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 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  following rent controls, minimum wage laws and tax  Ch 5 – Efficiency and equity - 2
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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  often discriminating (not fair): the good-looking  Ch 5 – Efficiency and equity - 3
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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 ? We need to go back to markets and define precisely what  Ch 5 – Efficiency and equity - 4
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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).
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