Econ 483_Lecture 21_Public provision

Comparison if the regulator sets 1 the social welfare

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Unformatted text preview: on pro…ts in the welfare function - the merger will be approved. Lecture 21: Public Support of R&D, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Comparison If the regulator sets λ = 1, the social welfare function is W = CS + Π i.e. the regulator values consumer surplus and pro…t equally. Should the merger be allowed? The regulator needs to compare total welfare before & after the merger. Lecture 21: Public Support of R&D, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Total welfare before the merger is W = CS + π A + π B = 800 + 100 + 100 = 1, 000 whilst total welfare after the merger is W = CS + π M = 612.5 + 925 = 1, 537.5 Change in welfare: 1, 537.5 1, 000 = 537.5 > 0 Since the merger results in an increase in welfare, a regulator with λ = 1 would allow the merger to go ahead. Lecture 21: Public Support of R&D, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. If the regulator sets λ = 0, the social welfare function reduces to W = CS The change in welfare is 612.5 800 = 187.5 < 0 Since the welfare change is negative (consumer surplus falls after the merger), a regulator with λ = 0 would not allow the merger to proceed. Lecture 21: Public Support of R&D, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved....
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This note was uploaded on 03/16/2014 for the course ECON 483 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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