The relevant personal arbitrage constraint is to

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Unformatted text preview: n consumers buy the socially optimal quantity (marginal utility equals marginal cost), whereas the low-valuation consumers buy less than the socially optimal quantity (marginal utility > marginal cost). I 2 Low-valuation consumers derive no net surplus, while high-valuation consumers derive a positive net surplus. I 3 “E¢ ciency at the top.” “Rent extraction at the bottom.” The relevant personal arbitrage constraint is to prevent high-valuation consumers from choosing the low-valuation consumers’bundle. J. Lagerlöf (U of Copenhagen) Microeconomics (MikØk) 3: L2-II Spring ‘ 11 19 / 29 Fully Non-Linear Tari¤: Conclusions (2/3) Intuition: Why e¢ ciency at the top, but not at the bottom? Key to the result is that the high type is the one who gets, for any given q, both: (i) the highest marginal utility [the “single-crossing condition”] and (ii) the highest total utility. Because of (ii), the …rm primarily wants to extract the high type’ surplus (as it’ larger). s s I However, if the high type has to pay too much, he can choose the low type’ bundle instead. s To prevent this, the monopolist makes the low type’ bundle less s attractive by o¤ering those consumers less. This works because of (i): The high type su¤ers more from a reduction in q than the low type. I See (again) the …gure on the next slide [L2-II, …g. 4]. J. Lagerlöf (U of Copenhagen) Microeconomics (MikØk) 3: L2-II Spring ‘ 11 20 / 29 Fully Non-Linear Tari¤: Conclusions (3/3) Suppose q stands for quality and the …rm is a railway company. I Then the di¤erence in service level between …rst- and second-class is larger under second best than under …rst best: q-distance under FB q SB ! < q FB < q SB = q FB !...
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