Economics 100B Microeconomics

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Economics 100BMicroeconomics
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Announcements

• Recall
• Final on Tuesday, June 12 7-10pm
• Extra office hours
• Me Friday, June 8 10-12pm
• JJ Monday, June 11 1.30-2.30pm

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Course Outline
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Todays Plan

• Externalities Private solutions
• Externalities Public solutions
• Review for the final

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I. Private Solutions

• The missing market problem can be solved by
  establishing property rights

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Coase Theorem (1)

• In the presence of externalities, the resulting
  allocation will be efficient if
• property rights are well-defined
• bargaining costs are zero

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Steel Producer Assigned Rights
Price
MC
Fisherys willingness to pay for reduced steel
production
There is scope for continued bargaining over
reduction of steel production as long as sgts
MCs
D
ps
Steel producers marginal loss in profits
Quantity of steel
s
s
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Coase Theorem (2)

• The initial assignment of rights is irrelevant
• subsequent trading will always achieve the same,
  efficient equilibrium

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Fishery Assigned Rights
Price
MC
Steel producers willingness to pay for increased
steel production
There is scope for continued bargaining over
reduction of steel production as long as slts
MCs
D
ps
Marginal loss in profits to fishery
Quantity of steel
s
s
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Limitations of the Theorem

• Applies most readily to localized externalities
• difficulties in assigning costs/benefits to
  firms/individuals
• free-rider and hold-out problems with large
  numbers of negotiators

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II. Public Solutions

• Incentive-based solutions originated with Pigou,
  who suggested that the most direct solution would
  be to tax (or subsidize) the externality-creating
  entity

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Pigouvian Corrective Tax
Price
MC
MCs t
MCs
A tax equal to these additional marginal costs
(at s) will reduce output to the socially
optimal level
D
ps
t
Quantity of steel
s
s
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Negative Production Externality

• Pigouvian corrective tax

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Limitations

• Determining the appropriate tax may require a
  prohibitive amount of information

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III. Review for Final

• Logistics
• Peterson Hall 102
• Tuesday, June 12, 7-10pm
• Exam lasts 3 hours
• No calculators or other aids allowed
• Bring a blue book (we will reassign blue books
  before the exam)
• Exam is worth a total of 100 points
• Allocate your time wisely

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A. Topics Covered

• Midterms program
• Applied competitive analysis (Chapter 11)
• General equilibrium and welfare (Chapter 12)
• Models of Monopoly (Chapter 13)
• Profit maximization (p385-391)
• Inefficient production (p391-394)
• Price discrimination (p397-404)

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Topics Covered

• Oligopoly (Chapter 14)
• Homogeneous oligopoly (p415-424)
• Cartel model
• Cournot model
• Stackelberg model
• Bertrand model (see lecture notes 6)
• Spatial differentiation (p426-428)

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Topics Covered

• Game Theory (Chapter 15)
• Basics (p440-451)
• Repeated Games (p451-453 and p455-456)
• Entry deterrence (p457-460)
• Games of incomplete information (p463-464)

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Topics Covered

• Uncertainty (Chapter 18 and 19)
• Expected-Utility (p533-538)
• Risk Aversion (p538-545)
• State-contingent preferences (p545-552)
• Insurance and information (p565-573)

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Topics Covered

• Externalities (Chapter 20)
• Definition, Inefficiency, and Solution (p586-595)

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B. Example 1 Monopoly

• Assume the following
• Consumer demand Q100-(1/2)P
• Cost function C(Q)Q225

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Example 2 Duopoly

• Assume the following
• Inverse demand curve f(Q) P 1 Q
• Firm 1s cost function C(q1) 0
• Firm 2s cost function C(q2) 0
• Total output Q q1 q2