Chapter 3 - Economic Efficiency

Chapter 3 - Economic Efficiency - Chapter 3 Economic...

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Chapter 3 Economic Efficiency
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Economics is concerned with how to make the best use of the society’s scarce resources to achieve maximum satisfaction of material wants. Three Questions: 1. What goods and services to produce? 2. How to produce them? 3. For whom to produce them (income distribution) We need a criterion to be able to answer these questions. That criterion is economic efficiency.
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Marginal Social Costs and Benefits Costs and Benefits Faced by the Society The marginal social cost (MSC) of producing a good or service is the amounts of “all the other things” that the society has to sacrifice in order to produce this good or service All the other things: 1. Other goods and services 2. Externalities
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Marginal Social Costs and Benefits Costs and Benefits Faced by the Society The marginal social benefit (MSB) of producing a good or service is the maximum amounts of “all the other things” that the society is willing and able to sacrifice in order to produce this good or service. Don’t forget: Avoided cost = part of marginal benefit
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Marginal Social Cost = Marginal Social Benefit Maximum Satisfaction for the Society Also called: Economic efficiency Allocative efficiency Pareto efficiency
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Chapter 3 - Economic Efficiency - Chapter 3 Economic...

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