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Chap_07 - Chapter 7 Efficiency and Exchange Purpose To...

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Chapter 7 Efficiency and Exchange Purpose: To acquaint students with the role of the market system as an allocator of resources and to show how inefficiencies develop whenever non-market forces prevent a market from coming into equilibrium. The chapter goes on to discuss direct income transfers as preferred to price ceilings as a means of assisting the poor. Marginal cost pricing, tax schemes, and deadweight losses are mentioned. The chapter provides some arguments in favor of and opposed to the market system as a way of organizing an economy. Length: 25 pages Time required to read: Two hours should be sufficient. This chapter reads easily, but complete understanding can be difficult. The chapter’s many figures and exercises enhance understanding. Reading the captions and legends on the figures is more important than in earlier chapters. Number of lectures required for understanding: At least two, possibly three. Three main themes require attention: Pareto efficiency, changes in economic surplus, and taxing schemes. Each theme could require an entire lecture period. Summary. The chapter opens with a statement regarding an unemployed family’s difficult economic circumstance and the breadwinner’s possible reflections that the circumstance may be the result of living in a market economy. The picture changes quickly to include discussions of Pareto efficiency and how unrestricted and unregulated markets can yield a situation that cannot be improved upon. Efficiency is suggested as the primary goal of a market economy, although it is admitted that some things that people want do not reach them through market transactions.
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Diagrams, exercises, and text are used to explain why price ceilings, subsidies, and first- come, first-serve policies engender inefficiencies. Arguments in each case are developed using economic surplus (consumer surplus + producer surplus) as a criterion. Marginal cost pricing is introduced and described in terms of government pricing schemes and economic surplus. Broadly defined taxes are analyzed with an eye to determining their effect on economic surplus and efficiency. Some comments are made relating to external costs and benefits associated with economic activity. Throughout the chapter, the authors show that income transfers are superior to market interference as a means to accomplish goals related to economic justice. Outline 1. Introduction 2. Market Equilibrium and Efficiency a. Efficiency is Not the Only Goal b. Why Efficiency Should be the First Goal c. Recap 3. The Cost of Preventing Price Adjustments a. Price Ceilings b. Price Subsidies c. First-Come, First-Served Policies d. Recap 4. Marginal Cost Pricing of Public Services a. Recap 5. Taxes and Efficiency a. Who Pays a Tax Imposed on Sellers of a Good?
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