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Microeconomics - Essay Example

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The fishermen however will be better off since they save a net damage worth of the area EQFF. Thus, the output will come down to Q* which is the social optimum. b) Fishermen own the right to clean water: In this case if the firm has to produce even a single unit, it will have to compensate the fishermen for the damage it causes. Similar to the earlier argument, the firm will pay the fishermen equal to the area BOQ*E and produce Q* which will leave a net benefit of area AEB for the firm. The fishermen will be indifferent between this deal and the initial outcome while the firm will strictly prefer it. 3. (a) An agent is said to have risk averse preferences if a certain income is preferred over and above a fair gamble that has the same expected income. In terms of curvature, this implies a positively sloped concave utility function defined over wealth. Figure 3: Risk averse preferences, certainty equivalent and risk premium for a gamble with equally likely outcomes of $8 and $12 (b) The certainty equivalent of a risky choice is the amount of certain income that generates the same utility level as does the risky choice. Typically, for a risk averse agent the monetary value of certainty equivalent is less than the expected monetary value of the risky choice. (c) The risk premium is the additional amount of earnings that has to be associated with the risky choice that makes the risk averse agent bear the risk and pick the risky alternative over and above the riskless choice (d) The maximum willingness

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to pay for insurance is the amount of premium that makes the agent indifferent between being insured and not. Technically in terms of the certainty equivalent of a gamble, the maximum amount a risk averse agent is willing to...
(b) The certainty equivalent of a risky choice is the amount of certain income that generates the same utility level as does the risky choice. Typically, for a risk averse agent the monetary value of certainty equivalent is less than the expected monetary value of the risky choice.
(c) The risk premium is the additional amount of earnings that has to be associated with the risky choice that makes the risk averse agent bear the risk and pick the risky alternative over and above the riskless choice
(d) The maximum willingness to pay for insurance is the amount of premium that makes the agent indifferent between being insured and not. Technically in terms of the certainty equivalent of a gamble, the maximum amount a risk averse agent is willing to pay for insurance is equal to the amount of money that would lead to a certain earning equal to the certainty equivalent of the uncertain situation facing which the consumer decides to purchase insurance.
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Summary

The Coase theorem states that in the absence of transaction costs, ownership of property rights does not matter for efficiency. In other words, as long as property rights are defined and enforceable, the efficient, socially optimum outcome can be attained regardless of whether the polluter or the victim owns the right to the property. …
Microeconomics
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