Controlling Prices to Increase Social Welfare

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Ratio of Social Cost to Profit

Note: in order to run the simulation referred to in this slide, go here, to the Java Applet version. You will be directed to download the latest version of the Java plug-in.

Recall that Klemperer shows us that our task is to minimize the ratio of social cost to firm profit (see the first slide of Topic 2). Here, we've duplicated the demonstration seen in the previous topic, except we've also added a display of this critical ratio, below.

Press "Go" and note what the ratio of social cost to firm profit is.

You can experiment with the price again on this slide to see the effect on the ratio, s / π. Notice that the ratio decreases as the price approaches zero. This general behavior is predicted by Gilbert and Shapiro.

Feel free to also change the demand curve and see if you can cause a different behavior. You can always come back to this slide to perform further experiments.

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