Mistake in sem 4

There is a mistake in the solution for seminar 4.

In problem 1 (b), the tax that achieves x* and y^0 is NOT t = D'(x*). It is t = b'(y^0) - c'(x*), where y^0 is uniquely defined by F'(x* + y^0) = b'(y^0).

Similarly, the subsidy is NOT s = -D'(x*)dx/dy, but s = b'(y) - F'(x*+y), with y uniquely defined from the condition F'(x* + y) = c'(x*).

With the RPS, the FOC wrt x is F'(x* + y) = c'(x*) + lambda*alpha. Compare this with the FOX wrt x under a subsidy. Since lambda, alpha > 0, and F'' < 0, y is closer to y^0 with an RPS than with a subsidy.

Eivind