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Lecture 31

ECON366 Lecture 31: Policy Instrument

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University of Alberta
Dana Andersen

ECON 366 Lecture 31 Policy Instrument Competitive bonus bid 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 1. market thinness (few bidders) 2. Risk aversion (bid less than expected value) 3. Winner curse (bid more than expected value) Royalties 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 Graph: Site marginal and average costs Our royalties will affect the marginal cost; will shift both MC and AC Graph: Bonus bids (shaded) and exante rents (zero) For firms: fixed costssunk cost How to change? After bidding, their profits are going to be zero; not going to earn any profits anymore; transfer profits (the bonus points) from firms to the govt and its not distortionary because it doesnt affect the marginal cost When the firm bid to the rents, they bid for their expected value of land, as the ex anted rents Graph: expost rents: high price Lets suppose the price is higher than what they expected; unexpected increase in the price; but what the firm actually earns depends on the realization of the price
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