Ch 5-6 – Efficiency and equity & Markets in Action

Ch 5-6 – Efficiency and equity & Markets in Action

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Ch. 5,6: Ch. 5,6: Efficiency and Equity Efficiency and Equity Markets in Action Markets in Action Olivier Giovannoni ECO 304K: Introduction to Microeconomics
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Outline Outline This chapter’s goal is to define markets at the “general” (social) level, see their features and compare markets to alternatives. 1. Resource allocation methods (markets and 7 alternatives) 2. Social Supply and Demand (the role of competition and flexible prices and for efficient markets) 3. Obstacles to efficiency (price controls) 4. Is the competitive market fair? 5. Ch.6: Markets in action. Examples of market situations Ch 5 – Efficiency and equity - 2
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1. Resource allocation methods 1. Resource allocation methods Resources are scarce and we want to use them in the best possible and most responsible way. There are several “allocation processes” possible for resources. Do markets do a “good” allocation of resources, do they lead to an efficient and fair situation? There are 8 major types of allocation processes: Market prices : the price is given by S&D and people adjust to the market’s price. But it can be too expensive for some: markets are efficient but there are fairness issues. Lottery : random allocation. This is fair, but is it efficient? Personal characteristics: This allocation process is Ch 5 – Efficiency and equity - 3
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1. Resource allocation methods 1. Resource allocation methods (…) (…) Contest : prize list given out to winners, unfair to the non-winners. First-come, first served (ex: restaurant tables, taxi cabs…) is not very fair. Majority rule : “vote” to decide what’s best for the majority. This is interesting, certainly fair and efficient. Command : “order” to do. Widespread and works well as long as the activities can be monitored. But this is not fair. Force/power : quite widespread: wars, laws and enforcement, competitor strength… But again, this is not fair. Compared to the alternatives, is the market doing a good job in terms of fairness and efficiency . But what can prevent the market to work efficiently and fairly ? Ch 5 – Efficiency and equity - 4
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2. Social supply and demand 2. Social supply and demand We say that resources are used in an efficient way when they are used in the way that people value the most (buyers and sellers). In the case of a market allocation process, efficiency happens when S=D (in equilibrium, for the price that reconciles buyers and sellers) Equivalently this happens when MB=MC Also, note the difference between value and price : The price is what we actually pay. The value of a good or service is the benefit we get from it. The value of one extra unit is the marginal benefit (MB). Recall that the MB curve is the demand curve: both represent the willingness to pay. Note
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This note was uploaded on 04/29/2009 for the course ECON 33815 taught by Professor Giovannoni during the Fall '08 term at University of Texas at Austin.

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Ch 5-6 – Efficiency and equity & Markets in Action

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