DOC PREVIEW
Berkeley ENVECON C101 - Welfare Economics

This preview shows page 1-2-3 out of 8 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 8 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 8 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 8 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 8 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Chapter #3: Welfare EconomicsContents: General Analysis Overview Welfare under Monopsony Welfare under Monopoly Welfare under MiddlemenGeneral Analysis OverviewWelfare analysis is a systematic method of evaluating the economicimplications of alternative allocations. Welfare analysis answers thefollowing questions:1. Is a given resource allocation efficient?2. Who gains and who loses under various resource allocations? Byhow much?Welfare economics: A methodological approach to assess resourceallocations and establish criteria for government intervention.Partial analysis: Evaluates outcomes in a subset of markets assumingefficiency in others.D = demand curve S = supply curveArea under demand curve ABC0 = gross Area under supply curve 0ELM = costbenefits from consumption. of production.ABP = consumer surplus area between PLM – area between price and supply =demand and price. producer surplus.2When there are no externalities, an efficient outcome occurs where thesum of consumers’ and producers’ surplus is maximized. • Area under demand = gross benefits• Area under supply = gross cost• Social surplus = gross benefit – cost.• A competitive equilibrium is efficient. It maximizes sum ofconsumer and producers surplus.3Welfare under MonopolyA monopoly is the only seller in a market. The basic condition for amonopoly is below: MaximizesQP(Q) Q− C(Q)P(Q) = Inverse demand: price as a function of quantity C(Q) = quantity.Optimality occurs where:P + Q∂P∂Q−∂C∂Q= 0MR(Q)− ML(Q) = 0MR = marginal revenueMC = marginal cost. QC = quantity under competitionPM = price under monopolyPc = price under competitionQM = quantity under monopoly.A monopoly produces too little and charges too much. Welfare lossunder monopoly is ∆ABC.4Linear Example of Monopoly inverse demand = P(Q) = a - bQrevenue = (a - bQ)Q = aQ-bQ2supply = c + dQcompetitive outcome = a - bQ = c + dQQc=a− cb+ dPc= a −ba− bcb + dPc=ad + bcb+ d.Under monopoly,a− 2bQ = c + dQQM=a− c2b+ d5PM= a −b a− c( )2b+ d=a b+ d( )+ bc2b + ddemand= 10 − Qsupply = 1+ QQC=10−12= 4.5 PC=10 +12= 5.5QM=93= 3 PM= 7Welfare under Monopsony A monopsony is the only buyer in a market.6MaximizeQB(Q)− QMC(Q)B(Q) = P(z)dz =0Q∫area under demand. The optimality condition is:∂B∂Q= Q∂MC∂Q+ MC(Q) Pmn= price paid by monopsonist Qmn= quantity produced by monopsonistMC(Q) = marginal cost of producers.Price paid by monopsonyMO= marginal outlay = MC(Q)+∂MC∂Q.=> Monopsonist: Underbuys and underpays. Monopolist: Underbuys and oversells.7Welfare under Middlemen A middleman is the only buyer and seller of product. QMM= middlemen outputPMMS= price paid by middlemen to suppliersPMMB= price paid to middlemen by buyersPMMBCE PMMS= middlemen


View Full Document

Berkeley ENVECON C101 - Welfare Economics

Download Welfare Economics
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Welfare Economics and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Welfare Economics 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?