Week 10 Notes (PAM 2000)
Week 10 Notes (PAM 2000) PAM 2000
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This 3 page Class Notes was uploaded by Eunice on Saturday April 9, 2016. The Class Notes belongs to PAM 2000 at Cornell University taught by McDermott, E in Fall 2015. Since its upload, it has received 19 views. For similar materials see Intermediate Microeconomics in Political Science at Cornell University.
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Date Created: 04/09/16
PAM 2000 McDermott Spring 2016 April 5, 2016 simple economy: two consumers o market demand has to equal market supply o consumer A and consumer B both have a certain amount of good X and good Y that they can trade o build an Edgworth Box given two graphs of the two consumers’ preferences, rotate one of them (consumer B) corners the bottom right corner: consumer A has all of good X and B has all of Y top right: consumer B has all of both goods dimensions width: total supply of good X height: total supply of good Y their two indifference curves intersect between the two points of intersection, both consumers are indifferent points to which both consumers would be willing to trade to: between the two curves “the eye of the economy” randomly preset price excess supply = too expensive excess demand = too cheap the length (or width) is the total supply so from the left (or bottom) is consumer A’s demand for X (or Y) and from the right (or the top) is consumer B’s demand for X (or Y) o if the demands don’t add up to precisely the supply then there is a surplus or shortage o equilibrium conditions: 1. quantity supplied=quantity demanded in all markets 2. (when there is an interior solution and we have 2 consumers): (*as with Cobb-Douglas preferences) MRS1=MRS2 which =px/py Pareto Optimality o equilibrium: there are no further possible gains from trade at that point o an allocation is pareto optimal if there is no other allocation which makes at least one agent better off without making any other agent worse off pareto efficient there are no more pareto improvements moving to an allocation which makes at least one person better without harming anyone else o contract curve the set of several pareto optimal allocations in an Edgworth Box with linear preferences: every point on the bottom and right axis (consumer A’s x axis and consumer B’s y axis) is pareto optimal the contract curve is a backwards L formed by the two axes First Welfare Theorem o any competitive equilibrium allocation will be pareto optimal April 7, 2016 externalities o externality: the direct effect of actions of a person or firm on another person’s wellbeing or a firm’s production capability rather than indirect effect through changes in prices o negative externality: one that harms o positive externality: one that benefits o externalities make competition inefficient r 450 e private cost: cost of production only, excluding externalities a social cost: private cost plus cost of the harms from externalities p A social marginal cost (MC*): the cost of manufacturing one more o ton of paper to the paper firms plus the additional externality n es MC t ps 282 damage to people in the community from producing this last ton r B of papeC D p pc 240 H $ 198 , G F MC g 84 p 30 0 Qs= 84 Qc= 105 225and Qo,ns of paper perad o deadweight loss: competitive market equates price with private marginal cost instead of social MC o competitive market: produces excessive negative externalities o optimal amount of pollution is greater than zero o government regulation on pollution emissions fee: tax on air pollution effluent charge: tax on discharges into the air or waterways internalizing the externality: to bear the cost of the harm that one inflicts on others or to capture the benefit that one provides to others o monopoly monopoly outcome (optimal quantity): may be less than the social optimum even with an externality also could potentially be over-producing because its decisions depend on its private marginal costs instead of social marginal costs at the same time: monopoly tends to under-produce because it sets its price above its marginal cost o markets for pollution cap and trade system: government gives firms permits each of which confers the right to create a certain amount of pollution each firm may use its permits or sell them to other firms o public good: nonrival and nonexclusive special type of externality free riding: benefiting from the actions of others without paying
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