Econ 281 Chapter10a - Ch 10 Competitive Markets...

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1 Ch 10: Competitive Markets: Applications Often government intervene in markets, even perfectly competitive markets, for a variety of reasons -Equity (instead of efficiency) -Fixing Market Failures -Achieving Policy Goals -Politics In this chapter we’ll use a partial equilibrium analysis – we’ll assume government intervention only affects 1 market We will also assume no externalities exist – no extra results will arise from these programs
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2 In 1776, Adam Smith’s  An Inquiry into the Nature  and Causes of the Wealth of Nations   discussed an “Invisible Hand” that guided  competitive markets to maximize efficiency. Although no “Invisible Hand” actually exists,  perfectly competitive markets do work to  maximize producer and consumer surplus
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3 For any given good: Consumer Surplus is difference between the  consumer’s willingness to pay and the price Producer Surplus is the difference between the  price and the producer’s willingness to provide Total Surplus is the difference between the  consumer’s willingness to pay and the  producer’s willingness to provide
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4 For example: Jacob is willing to pay $20 for the assignment  answers, and Beth is willing to sell her answers  for $10.  The PC market price for answers is 
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