European Commission’s preference for a common competition policy is given by the following function: P=1−X, where P denotes price, and X denotes the level of spending allocated to such policy. In the other side, Germany’s preferences as regards the aforementioned policy is given by the following function: P=1−(3/2)X . European Commission incurs a marginal cost equal to 1/3 in order to adapt such policy. In the other side, if the policy is undertaken from Germany alone, its average marginal cost would be: 1/2. Please respond to the following questions as follows.
a) Draw a diagram in which you illustrate the preferences of European Commission and Germany as concerns the competition policy.
b) Calculate the optimal level of spending for both agents (i.e. European Commission and Germany).
c) Analyze the trade-offs between centralization and decentralization for such policy. Calculate the benefits and losses emerging from centralization. Is it optimal to centralize the competition policy? Should Germany delegate such decision to European Commission?
d) Comment more on the results obtained from c) and explain why individual member states might undervalue the importance of competition rules.