Lecture Notes 1b - Public Economics Principles and Practice...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
Public Economics Principles and Practice Part 2: Markets and Government Peter Abelson Applied Economics and Sydney University
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
Economic Efficiency An efficient economy provides the maximum goods that individuals want from limited resources and technology. Overall efficiency requires three sub-sets of efficiency – Productive (technical) efficiency – Consumption (exchange) efficiency – Product mix (allocative) efficiency IIlustrated by production possibilities frontier These produce Pareto efficient outcome Cf: Potential Pareto efficiency (for reallocations)
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Production possibilities frontier
Background image of page 4
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 = MC MB = MC This maximises welfare defined as (consumer + producer pluses) A competitive market with no externalities meets efficiency requirements and therefore maximises welfare. Assumes all other markets are perfectly competitive. I they are not, there may be a second best problem.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Efficiency in a single market
Background image of page 6
Conditions for Efficiency in all Markets Three technical conditions • Efficient production. For any supply of inputs and technology, economy must be on PPF • Efficient consumption (exchange). Any given output (on PPF) must be exchanged efficiently between consumers • Efficient product mix. Product mix on PPF must be optimal given existing incomes (consistent with a point on UPC).
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Conditions for efficient production Marginal MRTS f KL = MRTS c KL rate of technical substitution of inputs = for all products (3.1) Outputs f = food, c = clothing Inputs K = capital, L = labour
Background image of page 8
Production efficiency
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Conditions for efficient consumption Marginal MRS fc A = MRS fc B rate of substitution of one good for another is same for all consumers (3.2) where A stands for Amy and B for Ben.
Background image of page 10
Consumption efficiency
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Conditions for product-mix efficiency Marginal MRT fc = MRS fc A = MRS fc B Figure 3.5 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) . (3.3) where MRT fc is marginal rate of transformation of food into clothing. See
Background image of page 12
Overall product-mix efficiency
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Work-leisure efficiency • Compensation (goods) that an individual wants for giving up leisure must equal marginal product of her labour. (3.4)
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/24/2010 for the course ECOS 3011 taught by Professor Peterabelson during the Three '10 term at University of Sydney.

Page1 / 81

Lecture Notes 1b - Public Economics Principles and Practice...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online