5

The Pigovian taxes are non-distortionary. For example imagine situation where government optimal spending is 100e and before Pigovian tax all 100e was raised through income tax which creates distortions on Labour market. Let’s say that after imposing Pigovian tax government gets additional 30e. Now since government needs only 100e for its optimal spending it ...


3

A situation can be Pareto efficient without also being a Pareto improvement over every other situation. So, here for example, equilibrium is Pareto efficient, but -- as you have noted -- is not a Pareto improvement over every other situation. Example. Say I have 100 apples to divide between A and B. The allocation (60, 40) is Pareto efficient, but it is ...


3

In a competitive market for a private good (y) individuals may consume different quantities but the equilibrium condition requires that: $$ \frac{\frac{\delta u^{i}}{\delta y}}{\frac{\delta u^{i}}{\delta x}} = MRS^{i}_{yx} = MRT_{yx} \; \forall \; i $$ In the case of a public good (g) individuals may have different MRS but consume the same amount of the ...


3

The "trick" of this question is that the fact that agents do not want to trade at the given prices does not mean the allocation is Pareto. The only thing you know is that if there is an allocation that is not a CE, there exists a vector of prices at which agents want to trade. Let me give an example: You have 2 apples and I have 2 bananas. I'm willing to ...


1

The long run equilibrium price should be $\$ y,$ however, in the short run, we only know that price must be higher that the minimum average variable cost (of which no info is given). In the long run all production takes place at the minimum average cost. All firms with average cost higher than $\$y$ will either adapt their technology and reduce their costs ...


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