S Lecture 14: Buchanan's Critique - How Does Imperfect Competition Affect the Design of Externality-Correcting Policies? Recap and Context Heterogeneous Externalities: Ideal policy needs varied tax rates; a uniform tax is only second-best. Diamond Model: Relevant for addressing heterogeneous externalities with a uniform tax; suggests a weighted average of marginal damages. Internalities: Justify policy intervention when actors' mistakes affect their own welfare. Lecture Objectives Nudges: Changes in choice settings that preserve options without altering prices, targeting mistakes by non-rational actors without affecting rational actors. Monopoly Power and Market Efficiency: Monopolists produce less than the efficient quantity, raising prices above competitive levels. Buchanan's Critique: The optimal externality-correcting tax in the presence of monopoly power differs from the Pigouvian prescription. Theoretical Foundations Rational vs. Non-rational Behavior: Distinction between mistakes due to lack of information vs. failure to act rationally. Policy Implications: For rational behavior, provide more information; for non-rational behavior, consider nudges or different presentation of information. Nudges: A Closer Look Nudges change choice environments to influence behavior, targeting non-rational behaviors without affecting rational decision-making. Examples include default options for retirement savings and placement of food in stores. Monopoly Power: Implications for Efficiency Monopolists maximize profit by setting marginal revenue (MR) equal