Presentation on theme: "Ch. 5: EFFICIENCY AND EQUITY"— Presentation transcript:
1 Ch. 5: EFFICIENCY AND EQUITY Allocative EfficiencyConsumer surplusProducer surplusMarket failures.Corrections for market failure.
2 Efficiency and the Social Interest Allocative efficiencyoccurs when it is not possible to produce more of a good or service without giving up some other good or service that is valued more highly.depends on people’s preferences.
3 Allocative Efficiency Marginal Benefit (MB)the benefit a person receives from consuming one more unit of a good or service.the dollar value of other goods and services that a person is willing to give up to get one more unit of it.decreasing marginal benefit implies that as more of a good or service is consumed, its MB decreases.
4 Allocative Efficiency For any given price, a consumer will buy all units of the good where MB>PThe MB curve will be identical to the consumer’s demand curve.Market demand curve is summation of individual MB curvesPMBQ
5 Allocative Efficiency Marginal Costthe opportunity cost of producing one more unit of a good or service.the dollar value of other goods and services required to produce one more unit of the good.increasing marginal cost implies that as more of a good or service is produced, its marginal cost increases.
6 Allocative Efficiency The MC curve is upward sloping.A firm will produce all units of a product where P>MCThe MC curve is the firm’s supply curve (more details later).MCPQ
7 Allocative Efficiency Efficiency and InefficiencyIf MB>MC, should produce and consume more of the good.If MB<MC, should produce and consume less of the good.If MB=MC, allocative efficiency obtained.MCMBQ*Quantity
8 Value, Price, and Consumer Surplus Difference between maximum amount consumers are willing to pay and the price of a good.Measured by the area under the demand curve (MB curve) and above the price paid, up to the quantity bought.
10 Cost, Price, and Producer Surplus the price of a good minus the marginal cost of producing it, summed over the quantity sold.measured by the area below the price and above the supply curve, up to the quantity sold.
12 Is the Competitive Market Efficient? At the equilibrium quantity,MB=MC, so the quantity is the allocatively efficient quantity.The sum of consumer and producer surplus is maximized at this efficient level of output.
15 What are the additional costs to producers of increasing pizza production from 5,000 to 10,000 per day? (keep in mind that quantity is measured in 1000s in the diagram below).264537OTHER11Matching Keywords: 0Keywords: 6250010
16 Obstacles to Efficiency ExternalitiesPrice ceilings and floorsTaxes, subsidies, and quotas.MonopolyPublic goods and common resources
17 Externalities When there are negative externalities: Social MC = Private MC + per unit negative externalityWhen there are positive externalities:Social MB = Private MB + per unit positive externalityRegardless of whether there are externalities, in a competitive market:Supply = Private MCDemand = Private MB
18 Is the Competitive Market Efficient? When there are negative externalities,SMC>PMCThe market produces “too much”deadweight loss resultsTaxes could “fix” market.
19 Is the Competitive Market Efficient? When there are positive externalities,SMB>PMBThe market produces “too little”deadweight loss resultsSubsidies could “fix” market.