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
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.
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.