L15 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of Microeconomics Professor Jo Hertel Lecture 16: Efficiency and Equity Efficiency in consumption, production and output levels, and how a competitive market economy achieves them What can go wrong with efficiency? Efficiency and equity Efficiency and equity in taxation
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2 What Do I Mean By “Efficiency”? Economists’ definition of efficiency: An efficient allocation of resources t akes advantage of every opportunity to make some people better off (in their judgment) while not worsening the circumstances of anyone else. In an efficient allocation of resources, no gains from trade are unrealized. Previously, we’ve looked at efficiency in one specific market. Now, we want to see what efficiency means for the economy as a whole.
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3 Consumption efficiency in the economy An economy is efficient in consumption when there’s no way to shift consumption goods between consumers that will make noone worse off (and at least one person better off). Consumption efficiency means that the MRS’s between any two goods must be equal across all consumers! A competitive market economy achieves CE as 1 1 , , consumer consumer A B A B MRS MRS 1 1 , , consumer consumer B A B A B A p MRS MRS p Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition
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4 Production efficiency in the economy An economy is efficient in production when there’s no way to increase total production of one good without decreasing total production of another good All inputs must be used to achieve production efficiency. To make things easier, we will in examples always focus on the case of only one input (labor)! A competitive market economy achieves PE because there is equilibrium in the labor market (i.e. surplus of labor can’t exist). Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition
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5 Production efficiency in the economy – the general case (not required) In general, an economy achieves efficiency in production if the mix of inputs is right across
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