ECON366 Lecture 31: Policy Instrument
12 May 2017
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Econ 366 - lecture 31 policy instrument. Bonus bids are made ex ante, before rents are known with certainty. Firms should be willing to bid up to the expected value rents. Why might not bid the expected value of rents: market thinness (few bidders, risk aversion (bid less than expected value, winner curse (bid more than expected value) Ad valorem royalties are paid ex post, after rents are known with certainty. Ad valorem royalty is payment in proportion to revenue (pq) Ad valorem sliding scale royalty is one in which the proportion is dependent on revenue. Alberta has sliding scale royalty that is dependent on both output and price. Our royalties will affect the marginal cost; will shift both mc and ac. Graph: bonus bids (shaded) and ex-ante rents (zero)
