Christopher Makler
Stanford University Department of Economics
Econ 51: Lecture 15
pollev.com/chrismakler
Internalize the externality so that private marginal cost equals social marginal cost.
Competitive equilibrium:
consumers set \(P = MB\),
producers set \(P = PMC \Rightarrow MB = PMC\)
With a tax: consumers set \(P = MB\),
producers set \(P - t = PMC\)
Village of 35 people who can choose to fish or hunt.
Each fish is worth $10; each deer is worth $100. Every hunter gets one deer.
If \(L\) people fish, (and \(35 - L\) people hunt), total fish caught: \(f(L) = 40L - L^2\)
Total revenue from fishing:
Total revenue from hunting:
Average revenue per fisher:
Average revenue per hunter:
Marginal revenue from additional fish:
Marginal cost of not having that person hunt:
What's the effect of an increase in \(L\)?
Suppose you needed to buy a fishing permit for a fee F.
What value of F would result in the optimal L*?
Suppose the village levied a tax of t per fish caught.
What value of t would result in the optimal L*?
Efficiency in the Edgeworth box comes from everyone equating their marginal benefits and costs.
In the presence of externalities, there is a mismatch between one's personal benefits and costs, and those society feels.