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Level 131

Concepts of Efficiency & Equity


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maximizes net benefits
In terms of benefits and costs, the efficient level of an activity is that level which
If a particular action causes net benefits to increase, then
the Pareto Criterion can be met, since it is possible to fully compensate any "losers" while leaving some people better off
Market failure means that the market mechanism will:
fail to produce the efficient quantity of a good and/or service.
Which of the following is an "external cost" associated with the production of a good?
any cost of production that is not borne the producer or consumer of the good, but is borne instead by some third party
characterized by nonrival consumption and nonexcludability
A "pure public good" is any good which is
A free-market economy (with no government intervention) will
provide less than the optimal quantity of public goods
Benefit
value of something that provides utility
cost
resources sacrificed or forgone to achieve a specific objective.
efficient
The more rational information in a market, the more informationally _______ it will be
Pareto Criterion
A change is Pareto Superior if at least one person is made better off and no one is made worse off (relative to their initial endowment)
marginal benefit
benefit gained from consuming the next good
Marginal Cost
Change in cost resulting from a 1-unit increase in output
In what sense is such an outcome efficient
We want all of those units for which the benefits exceed the costs and we want none of those units for which the costs exceed the benefits.
Consumer Surplus
Difference between what a consumer is willing to pay for a good the the amount actually paid
Producer Surplus
Gain from participating in a market- The difference between amount for which good sells and minimum amount necessary for seller to produce good
The sum of producer surplus and consumer surplus is total surplus, or net benefits
When markets are operating efficiently, what is true regarding the sum of producer surplus and consumer surplus?
inefficiency
Market failure
Sources of market failure (4)
Externalities, Public good, Imperfect competition, Imperfect information
Externalities
("spillover" effects) occur when costs (or benefits) "spillover" to affect third parties not directly involved in the transaction
Explain how externalities can give rise to market failure, using air pollution as an example
Pollution from a factory drifts downwind, harming a farmer's crops and polluting a lake. This imposes costs on others. If the producer does not bear this cost (because
Negative Externalities (external costs)
Social costs(full cost)=Private Costs(internal costs)+External Costs(costs borne by third parties)
public good
a good for which there is nonrival consumption
pure public good
has the property of nonexcludability.(Note that public goods may be privately funded and privately provided.)