GWLecture14

GWLecture14 - 1 Part IIa: Paper 1 General Equilibrium and...

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Unformatted text preview: 1 Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Snje Reiche 2 Outline Public goods Lindahl prices information failure Mechanism design Vickrey auctions Clarke-Groves taxes Books Cowell: Ch. 12.6.1-12.6.2, 13.6.3-13.6.5 Varian: 36.7-36.10 3 Public Goods and Market Failure If the public good is provided privately, then Whereas Pareto efficiency in a market with a public good requires So private provision of the public good leads to under- provision Why the market failure? An additional unit of a private good goes to either consumer A or consumer B An additional unit of public good benefits both consumers The marginal benefits are therefore summed MRT MRS MRS B A = = MRT MRS MRS B A = + 4 Lindahl Prices Can the first best (i.e. the Pareto efficient) amount of the public good be provided through the market? Government decides the share of the cost borne by each individual, such that Individual budget constraint changes from: to B A , 1 = + B A A A A e pG x = + A A A e pg x = + 5 Lindahl Prices Government asks individual A to announce her preferred consumption of G Individual As maximisation problem:...
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GWLecture14 - 1 Part IIa: Paper 1 General Equilibrium and...

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