Reference no: EM133082144

Question 1: An industry is made up of three large firms (L) and 100 small locals firms (S). Each firm's utility corresponds to their profit. The status quo policy (SQ) consists of a particular set of regulations, which results in profits of: Large Small SQ ProfitL(SQ) = 5, 000, 000 ProfitS(SQ) = 50, 000 That is, under the status quo, each large firm has profit of 5 Million and each small firm has profit of 50 Thousand. The government is considering a change in regulations on the industry. There are three proposals on the table. Large Small R1 ProfitL(R1) = 6, 000, 000 ProfitS(R1) = 51, 000 R2 ProfitL(R2) = 2, 000, 000 ProfitS(R3) = 300, 000 R3 ProfitL(R3) = 13, 000, 000 ProfitS(R2) = 10, 000

1a. Suppose that transfers are not possible. Which policies (amongst SQ, R1, R2, R3) are Pareto dominated? Explain.

1b. Suppose that transfers are not possible. Which policies are Pareto efficient? Which are utilitarian efficient? Are they the same? Explain.

1c. Suppose that transfers are not possible. For each proposed regulation Ri, identify a normative framework that would be in favor of moving from the status quo to the regulation Ri. (So, which normative framework would be in favor of moving from the status quo to R1? From the status quo to R2? From the status quo to R3?) Explain.

1d. Suppose now that all transfers are possible, provided they satisfy budget balance. Suggest a policy change (from the status quo) that would result in a Pareto improvement and is not itself Pareto dominated. Explain. Is this the only policy change you could have proposed? Explain.