1 / 12

Ramsey Pricing in The Presence of Externality Costs

Ramsey Pricing in The Presence of Externality Costs. Authors: Tae Hoon Oum and Michael W. Thretheway. Lecturer: Chaowei Fan. A. Brief Review of Simplest Version of Ramsey Prices. Why do we need Ramsey Price? 1. First-best prices are nonviable.

toya
Download Presentation

Ramsey Pricing in The Presence of Externality Costs

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Ramsey Pricing in The Presence of Externality Costs Authors: Tae HoonOum and Michael W. Thretheway Lecturer: Chaowei Fan

  2. A. Brief Review of Simplest Version of Ramsey Prices • Why do we need Ramsey Price? • 1. First-best prices are nonviable. • 2. Welfare-maximizing regulator must find an optimum set of prices subject to • these constraints. • How do we start? • 1. Requiring firm to adopt prices that deviate from marginal costs in order to • reach the target profit level. • 2. Assumptions: • 1). There is only one strong natural monopolist, who faces no completion • 2). The demands of products manufactured by this natural monopolist are • independent of one another • What do we obtain?

  3. B. What problems does Ramsey Pricing have? Independent Demands There should not exist only one multiproduct firm; there should exist many other multiproduct firms, thereby the goods are interdependent. Private Cost Ramsey only considers private costs But, we have to consider Social Cost Social Cost=Private Costs + External Costs 1). Private Cost: the costs that the buyer of a good or service pays the seller. This can also be described as the costs internal to the firm’s production function 2). External Costs: The costs that people other than buyer are forced to pay as a result of the transaction. The bearers of such costs can be either particular individuals or society at large Note: External costs are often both non-monetary and problematic

  4. C. What do Tae HoonOum and Michael W. Tretheway want to do? • Examining the Ramsey pricing rule • Where there are potential externality costs for all goods, • And where all demands can be interdependent • D. How do they proceed?

  5. Two sets of first order conditions must be satisfied to maximize the Lagrangian function

  6. Bad! Bad! Really Bad!!! Even if SW is Maximum.

  7. Another Big Finding

  8. D. What conclusion do we get? • When externality costs are present, the Ramsey rule is computed on the • basis of the sum of marginal private cost and a fraction of marginal • externality costs. It is not computed on the basis of social marginal costs. • The quantity shares under the first best social marginal cost pricing would • not be preserved under Ramsey pricing.

More Related