北京大学：中级微观经济学（下）：4

1 Chapter 10 Pricing in Factor Market 要素市场定价理论 ? 2005 MOL 2 Review: Firm and Household Decisions 3 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 4 Outlines of Today’s Class ? Understand why a firm’s marginal revenue product curve(MRP)(or VMP) is its demand for labor curve ? Explain in what sense the demand for labor is a “derived” demand ? Identify the key factors influencing the elasticity of demand for inputs ? Describe how equilibrium wage rates are determined for perfectly competitive firms 5 Readings about this chapter ? Zhang: Chapter 8,P263-279 ? Nicholson: Chapter 21, P577-604 Chapter 22,23 6 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 7 Firm Choices in Input Markets 8 Basic Input-Output Relation Automobile Factory Steel Glass Tires Plastic Other Components 9 Inputs: Complementary and Substitutable ? The productivity of an input is the amount of output produced per unit of that input. ? Inputs can be complementary or substitutable. This means that a firm’s input demands are tightly linked together. 10 Introduction: Factors of Production ? Complementary inputs are factors of production that can be used together to enhance each other. ? Substitutable inputs are factors of production that can be used in place of each other. 11 Demand for Inputs: A Derived Demand ? The demand for a factor of production is a Derived Demand(引致需求). ? Derived demand(引致需求) is a demand for inputs that is dependent on the demand for the outputs those inputs can be used to produce. ? Inputs are demanded by a firm if, and only if, households demand the good or service produced by that firm. 12 Example: A Firm’s Demand For Labour (Apple Pickers) The Market for Apples The Market for Apple Pickers Quantity of Apples 0 Price of Apples P Q Demand Supply Demand Supply Quantity of Apple Pickers 0 Wage of Apple Pickers L W households Firms 13 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 14 The Competitive Profit-Maximizing Firm ? Three basic assumptions about the firm are: ê It is competitive in both the product market and the input market. ê It is a price taker, for both the product it sells (e.g. apples) and the input it buys (e.g. apple pickers) ê Its goal is to maximize profits. ? The firm’s supply of apples and its demand for workers are derived from its primary goal of maximizing profits. 15 How many workers to hire? To maximize profits, the firm considers how much profit each worker would bring in. . . )()( )]([)]([ )( )()( .. )()()( LMCLMR LQMCLQMR LQQ QMCQMR COF QTCQTRQ =∴ =∴ = = ?= Q π 16 MR(L): Value of the Marginal Product ? Value of the Marginal Product(边际产品价值) (VMP L ) is the additional revenue a firm earns by employing one additional unit of an input, ceteris paribus. VMP L = (MP L ) x (P 0 ) ? the marginal product of the input (MP L ) multiplied by the market price of the output: ? VMP L is measured in dollars and diminishes as the number of workers rises because the market price of the good (P 0 ) is constant. 17 Marginal Product (MP L ) of Labor ? Faced with a capacity constraint in the short-run, a firm that decides to increase output will eventually encounter diminishing returns. ? Marginal product of labor (MP L ) is the additional output produced by one additional unit of labor. 18 Marginal Product (MP L ) of Labor ? Marginal Product (MP L ) of Labor ? The change in output resulting from the addition of one more worker ? The change in total output accounted for by hiring the worker, holding all other factors of production constant ? MP L eventually declines because of the law of diminishing returns L Q MP L ? ? = 19 Review: The Diminishing Marginal Product of Labour ? As the number of workers increases, the marginal product of labour declines. ? As more and more workers are hired, each additional worker contributes less to the production. ? The production function gets flatter as the number of workers rises. 20 Value of the Marginal Product Value of Marginal Product Curve MP L ,VMP L L MP L 21 MC(L): Marginal Factor Cost (MFC) ? Marginal Factor Cost (MFC)(边际要素成本) ? The cost of using an additional unit of an input L wL L QTVC L QTC MFC L ? ? = ? ? = ? ? = )()( 22 Marginal Factor Cost Labor Input (workers per week) Wage The firm D L S L Labor Input (workers per week) W 0 S L = MFC Industry labor market W 0 L 1 23 MC L : Marginal Factor Cost (MFC) ? In a perfectly competitive labor market: ? The market determines the wage ? The individual employer is a wage taker ? All workers are hired for the same wage ? So MFC = wage 0 0 w L Lw MFC = ? ? = 24 How many workers to hire? ? To maximize profit, the firm hires workers up to the point where the VMP L is equal to the cost of the labour, i.e. market wage. VMP L = WAGE ? The value-of-marginal-product curve is the labour demand curve for a competitive, profit- maximizing firm. 25 “How Many Workers Do I Hire?” VMP L & WAGE Quantity of labour Market Wage VMP L Curve w 0 26 “How Many Workers Do I Hire?” VMPL & WAGE Quantity of labour Market Wage VMP L Curve w 0 27 MFC < VMP MFC > VMP Marginal Revenue Product ? VMP = MFC ? Optimal number of workers Labor Input (workers per week) VMP L w 0 L 0 w 0 = MFC 28 “How Many Workers Do I Hire?” VMPL & WAGE Quantity of labour Market Wage Profit-Max Quantity VMPL Curve 29 Individual firm demand for Labor VMP L & WAGE Quantity of labour w 0 L 0 VMP L Curve w 1 w 2 L 2 L 1 30 Individual firm demand for Labor WAGE Quantity of labour w 0 L 0 d L w 1 w 2 L 2 L 1 31 The Two Profit-Maximizing Conditions ? The two profit-maximizing conditions are simply two views of the same choice process. 32 The Trade-Off Facing Firms 33 The Market demand curve for labour ? The Market’s labour demand curve is not merely the horizontal sum of firm’s VMP L curves. Higher industry output in response to a wage reduction also reduce the output price. The Market labour demand curve is steeper than that of each firm, and more inelastic. 34 Market Demand for Labor W a g e R a t e Labor per Period 20 VMP 0 (100 firms) VMP 1 25 45 20 10 Reduction in wage rate causes all firms to increase output; market supply increases; And output price falls. So VMP shifts left. Labor per Period Firm Market 2000 2500 35 Determinants of Demand Elasticity for Inputs ? The price elasticity of demand for a variable input will be greater ? The greater the price elasticity of demand for the final product ? The easier it is for a particular variable input to be substituted for by other inputs ? The larger the proportion of total costs accounted for by a particular variable input ? The longer the time period being considered 36 The End 37 Last Revised: Dec. 10, 2005 北京大学经济学院1 Chapter 10 Pricing in Factor Market ? 2005 MOL 北京大学经济学院2 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 北京大学经济学院3 Readings about this chapter ? Zhang: Chapter 8,P263-279 ? Nicholson: Chapter 21, P577-604 Chapter 22,23 北京大学经济学院4 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 北京大学经济学院5 Wage Determination in Labor market ? The demand for labor curve has been determined ? Now add an analysis of labor supply ? We can derive the equilibrium wage rate that workers earn in an Market 北京大学经济学院6 The supply of labour in the Labour market ? The LABOUR FORCE(劳动力): ? all individuals in work or seeking employment ? Labour supply ? for an individual, the decision on how many hours to offer to work depends on the real wage（真实工资） ? an individual’s attitude towards leisure and income determines if more or less hours of work are supplied at a higher real wage rate. 北京大学经济学院7 The individual’s supply curve of labour ? How should an individual trade off leisure against consumer goods in deciding how much to work? ? This is an application of the model of consumer choice. The choice is now between goods as a whole and leisure. An individual will want to work until the marginal utility derived from the goods that an extra hour of work will provide is just equal to the marginal utility from the last hour of leisure. 北京大学经济学院8 Labor Supply Curves for Individuals Eventually Bend Backward ? As wages rise, the market supply curve slopes upward ? For an individual, a very high wage may cause that person to wish to work fewer hours ? Income effect of higher wages predominates over the substitution effect（高工资所带来的收入效用 大于替代效用） 北京大学经济学院9 The individual’s supply curve of labour ? An increase in the real wage causes the change of the hours of the time. ? It leads to a substitution effect or pure relative price effect that makes people want to work more. But a higher real wage also tends to raise people’s real income. This has a income effect. Since leisure is probably a luxury good, the quantity of leisure demanded increases sharply when real incomes increase. This income effect tends to make people work less. The overall effect of a real wage rise, depends on which effect is larger. 北京大学经济学院10 劳动供给曲线及 其推导 北京大学经济学院11 The individual’s supply curve of labour Hours of work supplied R e a l w a g e SS 1 For the labour supply curve SS 1 , an increase in the real wage induces higher labour supply. SS 2 Whereas for SS 2 , there comes a point where a higher wage induces less hours of work to be supplied: labour supply is backward-bending. 北京大学经济学院12 Labour supply in aggregate ? If we consider the economy as a whole, or an industry ? a higher real wage rate also encourages a higher participation rate (the fraction of the population of working age who joint the labour market) ? so labour supply is likely to be upward-sloping 北京大学经济学院13 Labour-Market Equilibrium ? Labour supply and labour demand together determine the equilibrium wage, and shifts in the supply or demand curve for labour cause the equilibrium wage to change. ? Profit maximization by competitive firms demanding labour, ensures that the equilibrium wage always equals the value of the marginal product. 北京大学经济学院14 Labour market equilibrium for an industry ? The industry supply curve S L S L slopes up ? higher wages are needed to attract workers into the industry ? For a given output demand curve, industry demand for labour slopes down ? Equilibrium is W 0 , L 0 . Quantity of labour Wa g e D L D L S L S L W 0 L 0 北京大学经济学院15 Labour-Market Equilibrium: Shifts in the Supply and Demand of Labour ? The wage adjusts to balance the supply and demand for labour. ? Shift in Supply of labour: may be caused by increased number of available labour. ? Shift in Demand for labour: may be caused by an increased demand for the final product produced by labour. 北京大学经济学院16 A shift in product demand Quantity of labour Wa g e D L D L S L S L W 0 L 0 Beginning in equilibrium, The new equilibrium is at W 1 , L 1 . L 1 W 1 a fall in demand for the product also shifts the derived demand for labour to D' L D' L D' L 北京大学经济学院17 A change in wages in another industry Quantity of labour Wa g e D L D L S L S L W 0 L 0 Again starting in equilibrium, An increase in wages in another industry attracts labour, The new equilibrium is at W 2 , L 2 . L 2 W 2 so industry supply shifts to the left – S' L S' L 北京大学经济学院18 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 北京大学经济学院19 The Demand for Inputs in General ? if the firm buys all of its inputs, say, ? Labor ? Land ? Capital in competitive markets (is a price taker in all input markets) then: 北京大学经济学院20 The Demand for Inputs in General ? VMP of labor = price of labor (wage rate). ? VMP of land = price of land (rental rate of land). ? VMP of capital = price of capital (rental rate of capital services). ? And so on for every input. 北京大学经济学院21 Other Factors of Production: Land and Capital ? Capital: refers to the stock of equipment and structures used for production. ? The economy’s capital represents the accumulation of goods produced in the past that are being used in the present to produce new goods and services. 北京大学经济学院22 Two Prices for Land & Capital ? Purchase Price(购买价): ?the price a person pays to own that factor of production indefinitely. ? Rental Price（租价）: ?the price a person pays to use that factor for a limited period of time. 北京大学经济学院23 Determining the Rental Price and Quantity of Land and Capital ? Rental Price: ? The rental price of land and the rental price of capital are determined by supply and demand. ? Quantity Purchased: ? The firm increases the quantity hired until the value of the factor’s marginal product equals the factor price. 北京大学经济学院24 The Market for Capital P Q Supply Demand Rental Price of Capital Quantity of Capital 北京大学经济学院25 Profit Maximizing Quantities for Capital Market Price Profit-Max Quantity VMP Factor Price Quantity of Capital 北京大学经济学院26 Land and Land Rend ? Land has a perfectly inelastic supply curve—as rent to land increases, the Q supplied is fixed in the aggregate. ? Different uses of land will pay varying amounts of rent & the use with the highest VMP will acquire that land. ? Rent allocates the use of land among different activities. 北京大学经济学院27 Determination of Land Rent $2,000 Annual Rent per Acre Acres of Land 1,000 D D S S E 北京大学经济学院28 ? Fixed supply of land ? determination of the market level of land rent by the demand side The Determination of Rent 北京大学经济学院29 ? Economic rent = an "extra" payment for a factor of production (such as land) that does not change the amount of the factor that is supplied Economic rent 北京大学经济学院30 Economic Rent ? Economic rent = payment for an input in excess of opportunity cost. ? High paid entertainers & athletes earn some economic rent over & above their next best income. 北京大学经济学院31 The Determination of Rent ? Economic rent is, thus, that portion of the factor payment that exceeds the minimum payment necessary to induce any of that factor to be supplied. 北京大学经济学院32 The Determination of Rent ? Generalization: Economic Rent Seeking ? Economic rent is any payment made to a factor above the amount necessary to induce any of that factor to be supplied to its present employment. ? Some portion of every factor’s income will consist of economic rent in this sense, unless the factor’s supply curve is horizontal. 北京大学经济学院33 ? When athletes would be willing to play for quite a bit less than their salary, the “excess” salary is economic rent. ? This same analysis applies to any factor of production whose supply curve is not horizontal. ? Only those factors that can be reproduced by a number of producers at constant cost earn no rents. Application of Rent Theory: Salaries of Professional Athletes 北京大学经济学院34 ? People sometimes think that rents on housing are economic rents. ? They could then be lowered without reducing the quantity supplied. ? This may be true in the short run. Rent Controls: The Misplaced Analogy 北京大学经济学院35 ? But in the long run, the housing market is quite competitive. ? An effective rent control law is, therefore, likely to lead to a reduction in housing and consequent shortages. Rent Controls: The Misplaced Analogy 北京大学经济学院36 Chapter 10 includes: ? 10.1 Introduction to Factor Market ? 10.2 The Market Demand for the Factors of Production ? 10.3 Labor Market Equilibrium ? 10.4 Other Factors of Production - Land and Capital ? 10.5 Monopoly and monopsony power in the labour market 北京大学经济学院37 Monopsony(买主垄断) ? If the firm is not a price taker in the input market, it may have to offer a higher wage to attract more employees. ? A monopsony is the condition in which one firm is the only hirer in a particular input market. ? If the firm is a monopsony, it faces the entire market supply curve for the input. 北京大学经济学院38 Monopoly and monopsony power in the labour market ? A firm may have MONOPOLY power in its output market ? facing a downward-sloping demand curve ? so the marginal revenue (MRP L ) received from expanding output is less than the VMP ? as the firm must reduce price to sell more. ? A firm may face MONOPSONY power in its input market ? facing an upward-sloping supply curve for inputs, and must offer a higher factor price to attract more factors. The marginal cost of labour rises with employment 北京大学经济学院39 Causes of Monopsony ? If competition for inputs is lacking, monopsony may exit. ? The input may have high opportunity costs of moving to another input market. ? The input may be so specialized that there is only one firm that hires that input. ? Firms may join together to form a cartel in the input market. 北京大学经济学院40 Marginal Revenue Product (MRP) Under MONOPOLY power in its output market ? Marginal Revenue Product (MRP)(边际产品收益) ? The marginal physical product (MP L ) times the marginal revenue ? The additional revenue obtained from a one-unit change in labor input )( )()]([ )( LMRMP dL dQ P dQ dP Q dL dQ PQ dL dQ dQ dP dL LQLQdP LMRP L ?=? ? ? ? ? ? ? +?= ?+??= ? = 北京大学经济学院41 Relationship Between MRP and VMP VMP L L VMP,MRP MRP L O MRPVMP P e PMR LMPMRMRP LMPPVMP d ≥∴ ≤?= ?= ?= ) 1 1( )( ),( Q Q 北京大学经济学院42 Marginal Factor of Cost Under MONOPSONY power in its input market ? The Marginal Factor of Cost is the cost of hiring one more unit of an input. ? The firm has to offer a higher wage to the hired worker and to the workers already employed. ? Marginal Factor of Cost of labor (MFC) will exceed the price of the input if the firm faces an upward- sloping supply curve for the input. )( )( )( ))(( LW dL LdW LLW dL LWLd MFC ≥ ?+= ? = 北京大学经济学院43 MFC W 0 L Employment W MFC L W(L) )( )( )( ))(( LW dL LdW LLW dL LWLd MFC ≥ ?+= ? = 北京大学经济学院44 Pricing in imperfectly competitive output market and perfectly competitive input market W 0 VMP L L 1 Employment W Under perfect competition, a firm sets VMP L = W 0 and employs L 1 workers Facing a downward- sloping demand curve for its product, the firm sets MRP L = W 0 and employs L 3 workers MRP L L 3 E 1 E 3 ● ● 北京大学经济学院45 Pricing in perfectly competitive output market and imperfectly competitive input market W 0 VMP L L 1 Employment W MRP L L 3 A monopsonist recognizes that additional employment bids up wages for existing workers, so MFC L shows the marginal cost of an extra worker MFC L Facing a given goods price, the monopsonist sets MC L = VMP L and employs L 2 workers. L 2 W(L) E 2 ● 北京大学经济学院46 Pricing in imperfectly competitive output market and imperfectly competitive input market W 0 VMP L L 1 Employment W MRP L L 3 MC L L 2 For a monopsonist who also faces a downward- sloping demand curve for the product, MC L is set equal to MRP L to employ L 4 workers. L 4 So monopoly and monopsony power both tend to reduce the firm’s demand for labour. W(L) E 4 ● 北京大学经济学院47 Summary W 0 VMP L L 1 Employment W MRP L L 3 MC L L 2 L 4 W(L) E 4 E 1 E 2 E 3 ● ● ● ● 北京大学经济学院48 The End 北京大学经济学院49 Last Revised: Dec. 10, 2005 北京大学经济学院1 Chapter 11 General Equilibrium and Welfare Economics 一般均衡与福利经济学 ? 2005 MOL 北京大学经济学院2 Chapter 11 includes: ? 11.1 General vs. Partial Equilibrium ? 11.2 Pareto Efficiency in Exchange ? 11.3 Pareto Efficiency in Production ? 11.4 Pareto Efficiency in Exchange and Production ? 11.5 Competitive Markets and Pareto Efficiency ? 11.6 The First and Second Theorem of Welfare Economics 北京大学经济学院3 Readings about this chapter ? Zhang: Chapter 9,P280-298 ? Nicholson: Chapter 16, P421-449 Chapter 17,P456-487 北京大学经济学院4 Chapter 11 includes: ? 11.1 General vs. Partial Equilibrium ? 11.2 Pareto Efficiency in Exchange ? 11.3 Pareto Efficiency in Production ? 11.4 Pareto Efficiency in Exchange and Production ? 11.5 Competitive Markets and Pareto Efficiency ? 11.6 The First and Second Welfare Theorem 北京大学经济学院5 Review: Partial Equilibrium Analysis 北京大学经济学院6 General vs. Partial Equilibrium ? Partial equilibrium(局部均衡分析) ? Analysis of a single party or a single market ? Assumes price, quantity interactions with all other markets small enough to be ignored ? General equilibrium（一般均衡分析） ? Considers all interactions among markets ? Simultaneously obtains prices in all markets ? Consistent relationships among all markets for all variables (factors, incomes, etc.) 北京大学经济学院7 Interaction Among Different Markets Agriculture market Industry Market Labor Market ● ● ● ● ● ● 北京大学经济学院8 From Partial Equilibrium To General Equilibrium 北京大学经济学院9 When is Partial Equilibrium Appropriate? ? Only interested in a single market or a single party. ? Consumer’s choose how to allocate resources, taking prices as given. ? Firm’s choose how much to produce, taking demand as given. ? Market relatively small – does not affect other parts of economy. 北京大学经济学院10 When is Partial Equilibrium Not Appropriate? ? One market has significant effects on other markets. ? Complements/substitutes. ? Alternate uses for factors of production. ? Market is large relative to rest of economy. ? When the goal of the analysis is to evaluate the whole system. ? When we want to study how relative prices are determined in a market. 北京大学经济学院11 Why Do We Use General Equilibrium ? Partial Equilibrium neglects the way in which changes in one market affect other (product/factor) markets. ? General Equilibrium analyses the way in which the choices of economic agents are co- ordinated across all product and factor markets. 北京大学经济学院12 Simplest General Equilibrium Models: 2X2X2 Model ? 2 Factors of Production: L and K ? 2 Products: X and Y ? 2 Individuals/Consumers: Person A and Person B 北京大学经济学院13 Simplest General Equilibrium Models: 2X2X2 Model ? Exchange Economy ? 2 individuals/consumers (A and B) ? 2 products (X and Y) ? Production Economy ? 2 products (X and Y) ? 2 factors (L and K) ? General Equilibrium ? 2 individuals/consumers (A and B) ? 2 products (X and Y) ? 2 factors (L and K) 北京大学经济学院14 Economic Efficiency and Pareto Optimality (经济效率与帕累托最优) ? How to evaluate the situation of a resource allocation or economic efficiency. ? We can use Pareto Efficiency to express it. ? Pareto Efficient Allocation: ? An allocation of resources is pareto efficient if it is not possible (through further reallocation) to make one person better off without making someone else worse off. 北京大学经济学院15 Economic Efficiency and Pareto Optimality ? The Pareto definition then identifies particular allocation as being “inefficient” if unambiguous improvements are possible. ? Notice: the definition does not require interperson comparisons of utility. ? “Improvements”（帕累托改进）are defined by individuals themselves. 北京大学经济学院16 Chapter 11 includes: ? 11.1 General vs. Partial Equilibrium ? 11.2 Pareto Efficiency in Exchange ? 11.3 Pareto Efficiency in Production ? 11.4 Pareto Efficiency in Exchange and Production ? 11.5 Competitive Markets and Pareto Efficiency ? 11.6 The First and Second Welfare Theorem 北京大学经济学院17 Pareto Efficient in Exchange: Introduction ? Two consumers, A and B ? Endowments（禀赋）of goods X and Y are ω A = (ω X A , ω Y A ) and ω B = (ω X B , ω Y B ) ? E.g., ω A = (6, 4) and ω B = (2, 2) ? Total quantities available are ? ω X A +ω X B = 6 + 2 = 8 units of good X ? ω Y A +ω Y B = 4 + 2 = 6 units of good Y 北京大学经济学院18 Exchange: The Edgeworth Box （埃奇沃思盒状图） ? Theory of Exchange ? Modeled using Edgeworth box ? Shows all possible allocations of fixed quantities of goods X and Y between consumers A and B ? Start with initial allocation = endowments（禀 赋） ? After trade, end up with final allocation ? Traded quantities must be consistent 北京大学经济学院19 How to set up Edgeworth Box 1. Look at the world from Individual A’s perspective 2. Look at the world from Individual B’s perspective 3. Combine A and B’s worlds to form an Edgeworth box 北京大学经济学院20 Exchange Economy 2 Individuals: A and B 2 Products: 6 and 8 == YX Assume a world with no production and with fixed endowments of X and Y (hence the line on top of X and Y). 北京大学经济学院21 Starting an Edgeworth Box The dimensions of the box are the quantities available of the goods Height = 6 24 = += + B Y A Y ωω Width = 826 =+=+ B X A X ωω 北京大学经济学院22 Edgeworth Box: The Endowment ω A = (,)64 O A O B 8 4 6 X Y 6 北京大学经济学院23 Edgeworth Box: The Endowment ω B = (,)22 O A O B 8 6 2 2 6 4 北京大学经济学院24 Edgeworth Box: Endowment Allocation O A O B The endowment allocation （初始分配状况） A Y ω A X ω B X ω B Y ω E B Y A Y ω ω + B X A X ωω + 北京大学经济学院25 Other Feasible Allocations（其他可能分配状 况） ? (x A ,Y A ) denotes an allocation to consumer A ? (X B ,Y B ) denotes an allocation to consumer B ? Feasible allocation satisfies ? X A + X B = ω X A + ω X B and ? Y A + Y B = ω Y A + ω Y B ? So, all points in Edgeworth box (including those on boundary) 北京大学经济学院26 Feasible Reallocations: Diagram O A O B A Y A X B X B Y E 北京大学经济学院27 Indifference Curve From Individual A A 1 U A 2 U Total amount of Y O A X Total amount of 北京大学经济学院28 Indifference Curve From Individual B Total amount of X O B B 1 U B 2 U Total amount of Y 北京大学经济学院29 Edgeworth Box A Y ω A X ω O A B Y ω B X ω Y O B X 北京大学经济学院30 Pareto-Improving Reallocations(帕累托改进) ? Pareto-improving reallocation ? Re-allocation of endowment improving welfare of one consumer without reducing welfare of the other ? Only Pareto-improving reallocations will occur through voluntary trade（自愿交易） ? Can be easily identified on Edgeworth box diagram 北京大学经济学院31 Pareto-Improving Trades All trades inside black lens are Pareto-improving trades 北京大学经济学院32 Pareto-Improving Trades Trade improves both A’s and B’s welfare So, Pareto-improvement over endowment allocation 北京大学经济学院33 Pareto-Improving Trades New gains-from-trade region is set of all further Pareto-improving reallocations 北京大学经济学院34 Pareto-Optimality: Diagram Only way one consumer’s welfare can be increased is to decrease that of the other Pareto-optimal or Pareto-efficient Allocation where convex indifference curves are tangent U A U B 北京大学经济学院35 Pareto-Optimality: Diagram Both A and B are worse off Both A and B are worse off A is strictly better off but B is strictly worse off B is strictly better off but A is strictly worse off 北京大学经济学院36 Pareto-Optimality: Diagram A Y ω A X ω Y O A B Y ω B X ω O B X Identify all Pareto optimal allocations 北京大学经济学院37 Pareto-Optimality: Diagram A Y ω A X ω Y O A B Y ω B X ω O B X 北京大学经济学院38 Pareto-Optimality: Diagram A Y ω A X ω Y O A B Y ω B X ω O B Contract curve - set of all Pareto optimal allocations X 北京大学经济学院39 Contract Curve（契约曲线） ? The curve connecting all Pareto efficient allocations is known as the contract curve. ? At each point on the contract curve, the MRS’s for A and B are equal, i.e. MRS A xy = MRS B xy 北京大学经济学院40 Pareto-Improving Reallocations A Y ω A X ω Y X O A B Y ω B X ω O B The set of Pareto- improving reallocations 北京大学经济学院41 Pareto-Improving Reallocations A Y ω A X ω Y X O A B Y ω B X ω O B Pareto optimal trades blocked by B Pareto optimal trades blocked by A 北京大学经济学院42 Pareto-Improving Reallocations A Y ω A X ω Y X O A B Y ω B X ω O B Pareto-optimal trades not blocked by A or B are the CORE 北京大学经济学院43 The Core（核）: Definition ? Core - set of all allocations that are ? Pareto optimal allocations, and ? Welfare-improving for both consumers, given original own endowments ? Rational trade should achieve allocation in core ? Which core allocation? Depends on allocation mechanism (competition, monopoly, negotiation, etc.) 北京大学经济学院44 Chapter 11 includes: ? 11.1 General vs. Partial Equilibrium ? 11.2 Pareto Efficiency in Exchange ? 11.3 Pareto Efficiency in Production ? 11.4 Pareto Efficiency in Exchange and Production ? 11.5 Competitive Markets and Pareto Efficiency ? 11.6 The First and Second Welfare Theorem 北京大学经济学院45 Pareto Efficiency in Production Economy ? Productive Pareto（生产的帕累托状态） ? An allocation of resources is efficient in production (or “technically efficient”) if no further reallocation would permit more of one good to be produced without necessarily reducing the output of some other good. 北京大学经济学院46 Pareto Efficiency in Production Economy ? Two firms produce two products (X and Y) ? The firms use two factors of production, capital (K) and labour (L) ? Assume fixed endowments of K and L. 北京大学经济学院47 (Production) Edgeworth Box K L Total amount of Firm Producing Good Y Y 1 Y 0 X 0 X 1 At the tangency points: MRTS X LK = MRTS Y LK O X O Y ● E Firm Producing Good X Total amount of 北京大学经济学院48 Contract Curve of Production K L Total amount of Y 1 Y 0 X 0 X 1 You can join up all these (Pareto) efficient points to form the contract curve. O X O Y Total amount of 北京大学经济学院49 Contract Curve in Production （生产的契约曲线） ? The curve connecting all Pareto efficient allocations in production is known as the contract curve in production. ? At each point on the contract curve, the MRTS’s for X and Y are equal, i.e. MRTS X LK = MRTS Y LK 北京大学经济学院50 Chapter 11 includes: ? 11.1 General vs. Partial Equilibrium ? 11.2 Pareto Efficiency in Exchange ? 11.3 Pareto Efficiency in Production ? 11.4 Pareto Efficiency in Exchange and Production ? 11.5 Competitive Markets and Pareto Efficiency ? 11.6 The First and Second Theorem of Welfare Economics 北京大学经济学院51 Pareto-Optimality: Diagram A Y ω A X ω Y O A B Y ω B X ω O B Contract curve - set of all Pareto optimal allocations X 北京大学经济学院52 Contract Curve of Production K L Total amount of Y 1 Y 0 X 0 X 1 You can join up all these (Pareto) efficient points to form the contract curve. O X O Y Total amount of 北京大学经济学院53 Introduction ? We have described pareto efficiency in a simple exchange economy, and pareto efficiency in a simple production economy. ? We will now look at production and exchange together… … to do so, we need first to describe the economy’s production possibilities. 北京大学经济学院54 From Contract Curve in Production to Production Possibility Curve PPC Contract Curve 北京大学经济学院55 Production Possibility Curve Y Each point on the production possibility curve is (Pareto) efficient X 北京大学经济学院56 Production Possibility Curve MRTS X LK = MRTS Y LK Y x 北京大学经济学院57 Production Possibility Curve Points lie inside the curve are (Pareto) inefficient Y x 北京大学经济学院58 Production Possibilities Curve Feasible but inefficient Not feasible Feasible and efficient y The production possibilities curve is the set of technically efficient output bundles. x 北京大学经济学院59 Production Possibilities Curve Marginal rate of transformation is the number of units of y that must be given up in order to produce one more unit of x At every point on the PPF x MRTS x =MRTS y Slope of the PPC MRT=MC x /MC y y 北京大学经济学院60 Summary: PPC ? Meanings of PPC: ?社会在既定资源和技术条件下，所有可能达到的最优产出 量(X和Y)的集合。 ?生产可能性曲线上的每一点都对应着生产的契约曲线上的 点，因而也是有效率的帕累托最优点。 ? Characteristics of PPC ? Down-sloping to the right；(向右下方倾斜) ? Convex to the up-right.（向右上方凸出） ? MRT XY =MCx/MCy(机会成本) 北京大学经济学院61 Pareto Efficiency in Exchange and Production O B At this point we can draw in the amount of x and y produced Y Y O A X x 北京大学经济学院62 Pareto Efficiency in Exchange and Production O B Y Y O A X x 北京大学经济学院63 Pareto Efficiency in Exchange and Production F’: MRS XY A = MRS XY B = MRT 北京大学经济学院64 Pareto Efficiency in Exchange and Production Three Conditions for Pareto Efficiency in Exchange and Production : B XY A XY MRSMRS = (1) Y LK X LK MRTSMRTS = (2) B XY A XYXY MRSMRSMRT == (3) 北京大学经济学院65 From Contract Curve to Utility Possibility Curve 从契约曲线到效用可能性曲线 北京大学经济学院66 UTILITY POSSIBILITY CURVE D Y X Y X W MRT X’ Y’ W’ 北京大学经济学院67 Grand Utility Possibility Curve 总社会效用可能性曲线 北京大学经济学院68 Social Welfare(社会福利) ? How will a society choose where to be on the UPF? ? i) Voting is a way of deciding who gets what of the national pie. But there are problems, e.g., majority voting may not lead to a decision. ? ii) Define a social welfare function 北京大学经济学院69 Social Welfare Functions（社会福利函数） Bergson(1938)’s Social Welfare Fubction: W = W(U A ,U B ) ? Where ? W is social welfare ? U A is A’s utility ? U B is B’s utility 北京大学经济学院70 Maximizing Social Welfare 北京大学经济学院71 Social Welfare Functions（社会福利函数） ? What form might a Social Welfare function take? ? Examples for a society of n individuals ? Egalitarian(平均主义社会福利函数) ? Benthamite（边沁主义者）or Utilitarian（功利主义者）社会福 利函数: SW = U 1 + U 2 + ... + U n ? Generalised Utilitarian（一般形式的功利主义者社会福利函数）: SW = α 1 U 1 + α 2 U 2 + ... + α n U n ? Rawlsian（罗尔斯社会福利函数）: SW = min{U 1 , U 2 , ... , U n } ? The aim is to maximise social welfare. )/,,/,/( ))(,),(),(( 21 21 nXnXnXX XUXUXUWSW n n L L = = 北京大学经济学院72 v z u UPF SW 1 slope = –1 u is Pareto-efficient but “unfair” v is Pareto-inefficient but “fair” z is Pareto-efficient and “fair” W z > W v > W u Given α 1 = α 2 = 1, the allocation at z maximises social welfare for this Social Welfare function. SW 2 SW 3 SW = U A + U B U B U A 北京大学经济学院73 U B e UPF SW 1 SW = min{U A , U B } SW 3 SW 2 U A 北京大学经济学院74 Summary: Pareto Efficiency ? To have Pareto-optimality in production, it must be the case that… …w/r= MRTS LK x = MRTS LK Y . This implies that the economy must produce on the PPF. ? To have Pareto-optimality in exchange, it must be the case that… …p x /p y = MRS XY A = MRS XY B . This implies that the economy must consume on the exchange contract curve. 北京大学经济学院75 Pareto-optimal equilibrium ? When we consider production and consumption together, there is a third condition for an outcome to be Pareto-optimal. The rate at which the consumption of one good can be substituted for consumption of another, must equal the rate at which the production of one good can be substituted for the production of another good. MRS XY A = MRS XY B = MRT. 北京大学经济学院76 The End 北京大学经济学院77 Last Revised: Dec. 10, 2005 北京大学经济学院1 Chapter 12 Market Failure and Public Goods 市场失灵与公共产品 ? 2005 MOL 北京大学经济学院2 Chapter 12 includes: ? 11.1 Market Failure ? 11.2 Monopoly and Nature Monopoly ? 11.3 Externalities ? 11.4 Asymmetric Information ? 11.5 Public Goods and Common Resources 北京大学经济学院3 Readings about this chapter ? Zhang: Chapter 16,P468-493 ? Nicholson: Chapter 24, P659-683 北京大学经济学院4 Chapter 12 includes: ? 11.1 Market Failure ? 11.2 Monopoly and Nature Monopoly ? 11.3 Externalities ? 11.4 Asymmetric Information ? 11.5 Public Goods and Common Resources 北京大学经济学院5 Market Failure（市场失灵） ? The market mechanism may fail to provide the optimal mix of output. ? The optimal mix of output（产出的最优组 合）is the most desirable combination of output attainable with existing resources, technology and social values. 北京大学经济学院6 Market Failure M (market outcome) X (optimal mix) Too many computers Too few other goods COMPUTERS (units per time period) ALL OTHER GOODS (units per time period) 北京大学经济学院7 Market Failure ? Where the market mechanism fails to allocate resources efficiently ? Social Efficiency ? Allocative Efficiency ? Technical Efficiency ? Productive Efficiency 北京大学经济学院8 Market Failure ? Social Efficiency = where external costs and benefits are accounted for ? Allocative Efficiency = where society produces goods and services at minimum cost that are wanted by consumers ? Technical Efficiency = production of goods and services using the minimum amount of resources ? Productive Efficiency = production of goods and services at lowest factor cost 北京大学经济学院9 The Nature of Market Failure ? Market failure is an imperfection in the market mechanism that prevents optimal outcomes. ? Market mechanism（市场机制）— use of market prices and sales to signal desired outputs (or resource allocations). 北京大学经济学院10 The Nature of Market Failure ? The forces of supply and demand have not led to the best point on the production possibilities curve. ? Market failure establishes the basis for government intervention. 北京大学经济学院11 Sources of Market Failure ? There are four specific sources of microeconomic market failure: ? Market power（Monopoly） ? Externalities ? Imperfect Knowledge (Asymmetric Information) ? Public goods 北京大学经济学院12 Chapter 12 includes: ? 11.1 Market Failure ? 11.2 Monopoly and Nature Monopoly ? 11.3 Externalities ? 11.4 Asymmetric Information ? 11.5 Public Goods and Common Resources 北京大学经济学院13 Monopoly and Market Failure ? Market Power: ? Existence of monopolies and oligopolies ? Collusion ? Price fixing ? Abnormal profits ? Barriers to entry 北京大学经济学院14 Monopoly and Market Failure ? A market is Pareto efficient（有效率）if it achieves the maximum possible total gains-to-trade（Total Welfare）. ? Otherwise a market is Pareto inefficient or Market Failure . 北京大学经济学院15 The Pareto efficiency of Competitive Market $/output unit q MC(q) p(q) q e p(q e ) The efficient output level q e satisfies p(q) = MC(q). Total gains-to-trade is maximized. CS PS q e is the best optimal output 北京大学经济学院16 The Inefficiency of Monopoly $/output unit q MC(q) p(q) MR(q) q* p(q*) 北京大学经济学院17 The Inefficiency of Monopoly $/output unit q MC(q) p(q) MR(q) q* p(q*) CS PS Total Welfare: CS+PS 北京大学经济学院18 The Inefficiency of Monopoly $/output unit q MC(q) p(q) MR(q) q* p(q*) q e p(q e ) DWL The monopolist produces less than the efficient quantity, making the market price exceed the efficient market price. 北京大学经济学院19 The Inefficiency of Monopoly $/output unit q MC(q) p(q) MR(q) q* p(q*) CS PS MC(q*+1) < p(q*+1) so both seller and buyer could gain if the (q*+1)th unit of output was produced. Hence the market is Pareto inefficient. Because There exists the possibilities of pareto Improvement from q* to q e q e q* is a inefficient output 北京大学经济学院20 Ways of Correcting Market Failure ? Regulation: Natural Monopoly ? Antitrust 北京大学经济学院21 Regulation: Natural Monopoly ? Some monopolies can be regulated: government sets price equal to marginal cost. ? Problems with this policy: 1) incentives to invest in research and innovation decrease. 2) At that price monopoly could be making negative profits! 北京大学经济学院22 Regulating a Natural Monopoly ? So a natural monopoly cannot be forced to use marginal cost pricing. Doing so makes the firm exit, destroying both the market and any gains-to-trade. ? Regulatory schemes（规制方案）can induce the natural monopolist to produce the efficient output level without exiting. 北京大学经济学院23 Regulation: Natural Monopoly q D p M q () C ACq 0 ()AC q ()MCq ( ) D pq C p M p C q P m Unregulated, the monopolist would produce q m and charge P m . If the price were regulate to be P C , the firm would lose money and go out of business. Setting the price at AC(q C ) r yields the largest possible output; profit is zero. 北京大学经济学院24 Regulating Natural Monopolies ? Examples: phone companies, gas companies, public utilities in general. ? Regulations: 1. Let monopolist charge price equal to average cost. What is a firm’s cost function? 2. Government operates service: price equal marginal cost and subsidy to the firm to cover losses. 北京大学经济学院25 The Antitrust Laws ? Antitrust Laws（反托拉斯法）: ? Promote a competitive economy ? Rules and regulations designed to promote a competitive economy by: ? Prohibiting actions that restrain or are likely to restrain competition ? Restricting the forms of market structures that are allowable 北京大学经济学院26 Chapter 12 includes: ? 11.1 Market Failure ? 11.2 Monopoly and Nature Monopoly ? 11.3 Externalities ? 11.4 Asymmetric Information ? 11.5 Public Goods and Common Resources 北京大学经济学院27 Externalities and Market Failure Market failure refers to situations in which the invisible hand ( the market price) fails to allocate resources efficiently. Externality (外部性) is the situation in which one’s action affects others without compensating them. 北京大学经济学院28 Externalities ? Negative Externalities(负的外部性)（外 部不经济） ? Action by one party imposes a cost on another party ? Positive Externalities （正的外部性） （外部经济） ? Action by one party benefits another party 北京大学经济学院29 Negative Externalities: External cost Private cost (私人成本) is the cost borne by the one who acts.——个人最佳资源配置所发生的成本。 External cost (外部成本) is the uncompensated cost borne by others. Social cost (社会成本) is the total cost borne by the whole society (including all economic agents). It is equal to the sum of private cost and external cost.——整个 社会最佳资源配置所发生的成本。 北京大学经济学院30 Divergence between private and social costs （私人成本和社会成本的分离） Divergence between private and social costs is the situation in which private cost is different from social cost due to the presence of external cost. Example: Noise from a construction site 北京大学经济学院31 External Cost ? Scenario ? Steel plant dumping waste in a river ? The entire steel market effluent（污染排放 量）can be reduced by lowering output (fixed proportions production function) 北京大学经济学院32 External Cost ? Scenario ? Marginal External Cost (MEC)（边际私人成 本）is the cost imposed on fishermen downstream for each level of production. ? Marginal Social Cost (MSC)（边际社会成 本）is MC plus MEC. 北京大学经济学院33 External Costs_ excessive production MC S = MC I D P 1 Aggregate social cost of negative Externality(=DWL) P 1 q 1 Q 1 MSC MSC I When there are negative externalities, the marginal social cost MSC is higher than the marginal cost. Firm output Price Industry output Price MEC MEC I The differences is the marginal external cost MEC. q* P* Q* The industry competitive output is Q 1 while the efficient level is Q*. The profit maximizing firm produces at q1 while the efficient output level is q*. 北京大学经济学院34 External Cost ? Negative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run. 北京大学经济学院35 Positive Externalities: External benefit Private benefit (私人利益) is the benefit obtained by the one who acts. External benefit (外部利益) is the uncompensated benefit brought to others. Social benefit (社会利益) is the total benefit brought to the whole society. It is equal to the sum of private benefit and external benefit. 北京大学经济学院36 Divergence between private and social benefits （私人利益和社会利益的分离） Divergence between private and social benefits is the situation in which private benefit is different from social benefit due to the presence of external benefit. Example: Fundamental education 北京大学经济学院37 Externalities ? Positive Externalities and Inefficiency ? Externalities can also result in too little production, as can be shown in an example of home repair and landscaping（美化环 境）. 北京大学经济学院38 External Benefits_Less Production MC P 1 Repair Level Value D Is research and development discouraged by positive externalities? q 1 MSB MEB When there are positive externalities (the benefits of repairs to neighbors), marginal social benefits MSB are higher than marginal benefits D. q* P* A self-interested home owner invests q 1 in repairs. The efficient level of repairs q* is higher. The higher price P 1 discourages repair. 北京大学经济学院39 Ways of Correcting Market Failure ? Assumption: The market failure is pollution ? Ways of Correcting Market Failure ? Must reduce output to reduce emissions(污染排 放量) ? Use an output tax to reduce output ? Merge & Acquisition(购并方式)——外部性内部 化 北京大学经济学院40 The Efficient Level of Emissions Level of Emissions 2 4 6 Dollars per unit of Emissions 02468101214161820222426 MEC Marginal Cost of Abatement：MCA E* The efficient level of emissions is 12 (E*) where MCA = MEC. Assume: 1) Competitive market 2) Output and emissions decisions are independent 3) Profit maximizing output chosen At E o the marginal cost of abating emissions is greater than the marginal external cost. E 0 At E 1 the marginal external cost is greater than the marginal benefit. E 1 Why is this more efficient than zero emissions? 北京大学经济学院41 The Efficient Level of Emissions ? MEC为什么会上升？（其含义是减少（增加） 污染给社会的收益） ?现实中，将少量的污水排入一个干净的河流，河流 中的鱼类不会受到明显的负面影响。但是，随着排 入污水的逐步增加，合理的鱼肯定就会大量死亡， 渔民遭受的损失就会越来越大。 ? MCA为什么会下降？（减少污染给厂商带来的 成本） ?当排污量很大时，只要采取很平常的措施（如用活 性炭过滤污水），付出少量的成本就可减少一定的 污染，但是在继续减少污染的过程中，其技术就需 要越来越复杂，成本自然也就越来越高。 北京大学经济学院42 Ways of Correcting Market Failure ? Options for Reducing Emissions to E* ? Emission Standard（制定排放标准） ? Set a legal limit on emissions at E* (12) ? Enforced by monetary and criminal penalties ? Increases the cost of production and the threshold price（最低价格）to enter the industry 北京大学经济学院43 Standards and Fees Level of Emissions Dollars per unit of Emissions MEC MCA 3 12 E* Standard Fee 北京大学经济学院44 Ways of Correcting Market Failure ? Options for Reducing Emissions to E* ? Emissions Fee（征收排放费） ? Charge levied on each unit of emission 北京大学经济学院45 Total Abatement Cost Cost is less than the fee if emissions were not reduced. Total Fee of Abatement Standards and Fees Level of Emissions Dollars per unit of Emissions MEC MCA 3 12 E* Fee A B E C 北京大学经济学院46 Ways of Correcting Market Failure ? Standards Versus Fees ? Assumptions ? Policymakers have asymmetric information ? Administrative costs require the same fee or standard for all firms 北京大学经济学院47 Ways of Correcting Market Failure ? Advantages of Fees ? When equal standards must be used, fees achieve the same emission abatement at lower cost. ? Fees create an incentive to install equipment that would reduce emissions further. 北京大学经济学院48 Ways of Correcting Market Failure ? Summary: Fees vs. Standards ? Standards (incomplete information) yield more certainty on emission levels and less certainty on the cost of abatement. 北京大学经济学院49 Ways of Correcting Market Failure ? Summary: Fees vs. Standards ? Fees have certainty on cost and uncertainty on emissions. ? Preferred policy depends on the nature of uncertainty. 北京大学经济学院50 Ways of Correcting Market Failure ? Transferable Emissions Permits（转让排放权 或排污许可证）——引入市场机制解决排污问 题 ? Permits help develop a competitive market for externalities. ? Agency determines the level of emissions and number of permits ? Permits are marketable ? High cost firm will purchase permits from low cost firms 北京大学经济学院51 Ways of Correcting Market Failure ? Question ? What factors could limit the efficiency of this approach? 北京大学经济学院52 Externalities and Property Rights ? Property Rights ? Legal rules describing what people or firms may do with their property ? For example ? If residents downstream owned the river (clean water) they control upstream emissions. 北京大学经济学院53 Externalities and Property Rights ? Coase Theorem ? When parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient, regardless of how the property rights are specified. 北京大学经济学院54 Further Understanding Coase Theorem ?产权是指个人或厂商使用资源的一组权利，它 包括使用权、收益权和转让权。 ?科思定理： ?当产权可以自由交换，且交易成本为零时，无论最 初将产权分配给谁，资源最终的配置将是有效率 的，可以实现帕累托最优。 ?科思定理的前提条件 ?产权必须明晰，即资源都有明确的所有者； ?产权的交易无摩擦，交易的本身对交易双方都不会 增加成本。 北京大学经济学院55 Externalities and Property Rights ? Costly Bargaining --- The Role of Strategic Behavior ? Bargaining requires clearly defined rules and property rights. 北京大学经济学院56 Externalities and Property Rights ? A Legal Solution --- Suing for Damages ? Fishermen have the right to clean water ? Factory has two options ? No filter, pay damages ? Filter, no damages 北京大学经济学院57 Externalities and Property Rights ? A Legal Solution --- Suing for Damages ? Factory has the right to emit effluent ? Fishermen have three options ? Put in treatment plant（建立个治污厂） ? Filter and pay damages ? No plant, no filter 北京大学经济学院58 Externalities and Property Rights ? Conclusion ? A suit for damages results in an efficient outcome. ? Question ? How would imperfect information impact the outcome? 北京大学经济学院59 Ways of Correcting Market Failure ? Recycling（回收重复利用） ? Households can dispose of glass and other garbage at very low cost. ? The low cost of disposal creates a divergence between the private and the social cost of disposal. 北京大学经济学院60 The Efficient Amount of Recycling Scrap Cost 04812 MCR MSC m* With a refundable deposit, MC increases and MC = MSC = MCR. MC + per unit refund MC m 1 Without market intervention the level of scrap will be at m 1 and m 1 > m*. 北京大学经济学院61 The End 北京大学经济学院62 Last Revised: Dec. 26, 2005