xid-6970657_2 - TS = 2048 . If a regulation or tax is...

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Equilibrium – Externality problem: Suppose that S = P = 10 + .075Q and D = P = 42 -.125 Q Equilibrium = 10 + .075 Q = 42 - .125 Q = .2 Q = 32; so Q = 160 , and at Q of 160, P = 22 What is consumer surplus? = (42-22) * (160) * .5 = 1600 What is producer surplus? = (22 - 10) * (160) * .5 = 960 Total surplus = CS + PS = 2560 The demand and supply functions represent marginal private benefits and costs. Now, suppose. ....we learn that there are marginal external costs, as well, and that these marginal external costs are estimated to be equal to MEC = .05Q. Does the equilibrium condition estimated above represent an efficient equilibrium? Now our marginal social costs are equal to MPC+MEC = 10 +.075Q +.05Q = 10 + .125 Q. To estimate the efficient equilibrium, we need MSB = MSC = 42 -.125 Q = 10 +.125 Q = .25 Q = 32, and Q = 128 At this equilibrium P = 10 + .125(128) or 42 - .125 (128) = P = 26 . Now, CS = 16 x 128 x .5 = 1024; and PS = 16 x 128 x .5 = 1024, so
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Unformatted text preview: TS = 2048 . If a regulation or tax is created to address the external cost, it would seem as though society would be worse off - equilibrium P is higher, and Q is lower, than before the regulation was imposed. But. ...we haven't accounted for the social costs and benefits of the rule. Let's look at the 'lost' area with the regulation in place. ....From the original supply (MPC) function, at Q = 128, P is equal to 10 + .075 (128) = 10 + 9.6 = 19.6. So the area of the 'loss' triangle is (26-19.6)* (32) * .5 = 102.4, which appears to be deadweight loss - but what were the social costs at the initial level of output (Q = 160)? Using the MSC function: 10 + .125*(160) = 10 + 20 = 30 = MSC. ..and (30-22) (32)*.5 = 128. So the total gains to society = 128 + 102.4 = 230.4, and the costs of achieving this improvement are 102.4, so net improvement in efficiency = 128....
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This note was uploaded on 04/05/2012 for the course ECP 3302 taught by Professor Staff during the Fall '11 term at Florida State College.

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