Mia Ha - Problem Set 5.docx - Mia Ha ECON 436 Summer...

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Mia Ha ECON 436 Summer Quarter - 2019 Fifth Problem Set I/ A. What is the definition of economic efficiency? Economic efficiency is a state of the economy in which all resources are optimally utilized/used so that there is no waste and it will make people better of while not making anyone else worse off. B. Briefly explain why being inefficient is considered undesirable. Being inefficient is considered undesirable it means the economy does not use all the resources available optimally. Besides, being inefficient could also mean there are changes that make some individual better off but make others worse off. In this case it is really not desirable. C. Does this mean that any change that moves the economy from an efficient situation to an inefficient one is undesirable? Why or why not? Any change that moves the economy from an efficient situation to an inefficient one Is definitely undesirable, because we do not want an economy In which the are policies made to make individuals better off while making someone else worse off. We also want to optimally utilize all the resources with no waste. That’s why such changes towards inefficiency are considered as undesirable. II/ A. When is a change considered desirable according to the Potential Compensation Criterion? According to the Potential Compensation Criterion, a change Is desirable if the losers are compensated and the dollar value of the gains to gainers is greater than the losses to losers. Another thing Is if the net benefits are positive then we would want that change.
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