Applied welfare economics

Question 1

Effects of a tax wedge t

Answer 1

Consumer price increases
Decrease in demand
Decrease in producer price at this lower quantity

Question 2

Public goods

Answer 2

Have zero opportunity cost of consumption
Hence the efficient allocation would be to supply for free
However this will not be a market equilibrium as the cost of production is positive

Question 3

A method of rectifying public goods

Answer 3

Samuelson Rule
Marginal benefit equals marginal cost
(How do you measure accurate valueation by the public?)

Question 4

Externalities

Answer 4

Non excludable and non-rival

Direct (rather than market) effect on other agents

Question 5

Pigouvian tax

Answer 5

Sets marginal loss equal to tax. (when supply = demand etc)

Question 6

Coase 1960

Answer 6

Argues that when no transaction fees doesn’t matter who you assign property rights to- you will get an efficient outcome (use of 2nd welfare theorem)

Question 7

Farrel 1987

Answer 7

Criticises Coase’s paper saying that all he has done is quite literally re-state the 2nd welfare theorem

Question 8

Problems with the European cap and trade carbon scheme

Answer 8

Carbon leakage (nations outside of cap and trade now have a comparative advantage on production which emits Co2)
Price has been unsustainable and low (as a result of quantity caps- no long term incentive to invest)

Question 9

Effect of uncertainty on equivalence

Answer 9

Weitzman 1974
Under conditions of uncertainty quotas and taxes are no t equivalent
If steep loss function - great costs of getting quantity wrong - want to set quantity with a cap