Page 369 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes The output of (i) and (ii) states that competitive production is fixed at that place where value line and
indifference curves are mutually tangent that is MRT = P /P = MRT this is point E on Fig. 24.3.
xy x y xy
Actually, this competitive control is Parotean complete control or Parotean optimization. But ideal
output is fixed at that place where transfiguration curve touches indifference curve. However, it is in
the absence of external effects that the situation of competitive production and ideal output is same,
which is shown as E in Fig. 24.3.

Fig. 24.3

P
T
Goods-Y Y 1 E

l l 2
1
l
O X C L
1
Goods-X

But if those who produce commodity X exist in business by external effects, then their marginal social
cost will diverge from the marginal personal cost. Thus in this business, the average of marginal social
cost and producers of commodity Y will not equal. In other words, transfiguration curve and value line
are mutually not tangent.

First think of that situation where external effects are found in the production of commodity X. To
control production, the required value line is shown as bb line in Fig. 24.4. The gradient of this line is
more than the gradient of curve TC which means that the marginal personal cost is more than marginal
social cost. Now think that external effects exist in the production of commodity X. Value is shown as
dd line whose gradient is less than the gradient of transfiguration curve. Here compared to marginal
personal cost, marginal social cost is more.
In the lack of external effects, point E is the point of ideal output where indifference curve I and
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transfiguration curve TC touch each other. This is what the situation is for competitive production
as well because value line touches to indifference curve I and transfiguration curve TC. If during
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the situation of external diseconomies of production, commodity X is produced then control point
is B which is to the right of E. Here value line is tangent to point B of indifference curve I where
commodity X will be produced and therefore the control point is D which is to the left of E. Here
value line dd touches indifference curve at point D where the output of commodity X OX which
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is comparatively higher than its ideal output OX. Point B and D cannot be ideal output as they
comparatively are placed below at indifference curve whereas point E is comparatively placed above
curve I .
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