Competition and Environment I

Willingness to pay is area under demand.

demand price P(Q) is amount willing to pay for next unit

So total willing to pay is P(0) + P(1) + ...+ P(Q-1)

actually this is a lower riemann sum and an approximation

the integral is the actual area

Consumer surplus is willingness to pay less amount paid

Variable Cost is MC(0) + MC(1) + ...+ MC(Q-1)

Define Social Welfare as Willingness - Costs

same as surplus plus profit

picture: marshallian cross with triangle

Competition Maximizes Social Welfare

see picture:

Example: Tax (like the Germans would have placed on Polish exports if they owned Dantzig and not Poland) Dead weight loss of taxation.











Find pre and post tax Social Welfare. Find amount of tax.

Example Environment:

MCF is cost to firm

MCP is cost of pollution not born by firm

MC is MCF + MCP. real marginal cost

market sets mcf = demand, but should set mc = demand.

find deadweight loss

what happens if a tax of mcp? a reg to force right amount of output. who gets $$$ in both cases.