Ch05 - Chapter 5 Efficiency and Equity I Resource...

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C h a p t e r 5 : E f f i c i e n c y a n d E q u i t y I. Resource Allocation Methods A. Resources must be allocated. There are several allocation methods: 1. Market price —The people who are willing and able to buy a resource get the resource. 2. Command —a command system allocates resources by the order (command) of someone in authority. A command system works well in organizations with clear lines of authority but does not work at allocating resources in the entire economy. 3. Majority rule —resources are allocated in accord with majority vote. Majority rule works well when the allocation decisions being made affect a large number of people and self-interest leads to bad decisions. 4. Contest —resources are allocated to the winner. Contests work well when the efforts of the players are hard to measure. 5. First-come, first-serve —resources are allocated to those who are first in line. This allocation method works well when the resource can serve just one user at a time in a sequence, as is the case with, say, a bank teller. 6. Lottery —resources are allocated to the people who pick the winning number. Lotteries work best when there is no effective way to distinguish among potential users of a scarce resource. 7. Personal characteristics —resources are allocated to people with the “right” characteristics. 8. Force —resources are allocated to those who can take the resources. II. Demand and Marginal Benefit A. Resources are allocated efficiently when they are used in the ways that people value most highly. This outcome occurs when marginal benefit equals marginal cost. B. The value of one more unit of a good or service is its marginal benefit , which we can measure as maximum price that a person is willing to pay. 1. A demand curve for a good or service shows the quantity demanded at each price. A demand curve also shows the maximum price that consumers are willing to pay at each quantity. So a demand curve is a marginal benefit curve. C.
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Fall '08 term at Temple.

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Ch05 - Chapter 5 Efficiency and Equity I Resource...

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