Chapter 9 - Chapter 9 Efficiency Analysis of Markets and...

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Chapter 9: Efficiency Analysis of Markets and Government Policies Topics: Review of Consumer Surplus, Producer Surplus Market Efficiency The effects of Price Floors, Ceilings, Quotas and Taxes (skip section 9.5) Consumer and Producer Surplus Recall the effects of a binding price ceiling from chapter 2, section 7. P Q
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Who’s better off? Who’s worse off? As with all policies, some gain, some lose How do we measure gains / losses? What is the net effect on the economy? Our answers come from studying economic efficiency Allocative Efficiency The allocation of resources is efficient when net benefits in the economy are maximized There are two parties to a market transaction, buyer and seller. The net benefit to each is referred to as consumer surplus (s. 4.4) and producer surplus (s. 8.6) Review of Consumer Surplus Value is about what you get, price is what you pay Value – the maximum amount you would be willing to pay Example: Say the price of some good is $ 5, but you would have paid up to $ 9. By purchasing the good, you are making yourself $ 4 better off.
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Add this up for all 10,000 units… CS = Review Producer surplus
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