PE powerpoint Part BW 2

PE powerpoint Part BW 2 - Public Economics Principles and...

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Public Economics Principles and Practice Part 2: Markets and Government Peter Abelson Applied Economics and Sydney University
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Chapter 3: Competitive Markets: Efficiency and Welfare Economic Efficiency: Meanings Efficiency in a Single Market Conditions for Efficiency in all Markets Efficiency, Equity and Social Welfare Competitive Markets and Efficiency: First Welfare Theorem Competitive Markets and Equity: Second Welfare Theorem Conclusions
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Economic Efficiency An efficient economy provides the maximum goods that individuals want from limited resources and technology. Illustrated by Production Possibilities Frontier Four kinds of efficiency Full employment of resources (on PPF) Productive (technical) efficiency (on PPF) Product-mix efficiency (preferred part of PPF) Consumption (exchange) efficiency Note also dynamic or inter-temporal efficiency These produce Pareto efficient outcome Cf: Potential Pareto efficiency (for reallocations)
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Production Possibilities Frontier
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Efficiency in a Single Market Core economic principle: a competitive equilibrium is Pareto efficient Partial equilibrium (one industry) analysis (Figure 3.2) Efficiency requirements: Costs are minimised P = MR = MC This ensures that MB = MC This maximises welfare defined as (consumer + producer surpluses) A competitive market with no externalities meets efficiency requirements and therefore maximises welfare. Assumes all other markets are perfectly competitive. If they are not, there may be a second best problem.
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Efficiency in a single market
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Conditions for Efficiency in all Markets Must meet the key technical conditions Efficient production (including FE). For any supply of inputs and technology, economy must be on PPF Efficient consumption (exchange). Any given output must be exchanged efficiently between consumers Efficient product mix. Product mix on PPF must be optimal given existing incomes (consistent with a point on UPF).
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Conditions for efficient production Marginal rate of technical substitution of inputs = for all products MRTS f KL = MRTS c KL (3.1) Outputs f = food, c = clothing Inputs K = capital, L = labour
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Production efficiency
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Conditions for efficient consumption Marginal rate of substitution of one good for another is same for all consumers MRS fc A = MRS fc B (3.2) where A stands for Amy and B for Ben.
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Consumption efficiency
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Conditions for product-mix efficiency Marginal rate at which firms can transform one good into another equals marginal rate at which consumers wish to trade the two goods (equals opportunity costs) . MRT fc = MRS fc A = MRS fc B (3.3) where MRT fc is marginal rate of transformation of food into clothing. See Figure 3.5
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Overall product-mix efficiency
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Work-leisure efficiency Compensation (goods) that an individual wants for giving up leisure must equal marginal product of her labour.
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This note was uploaded on 12/02/2009 for the course ECOS a taught by Professor A during the Three '09 term at University of Sydney.

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PE powerpoint Part BW 2 - Public Economics Principles and...

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