14consumer_surplus-ho - Gains From Trade Consumer Surplus...

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Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium Market Demand Measuring Welfare with Consumer Surplus (Chapter 14)
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Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium Market Demand Announcement Clicker frequency needs to be reset every time you turn it on. Hold down on-off until blue LED flashes. Press A Press B Green means success, red means try again
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Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium Market Demand Measuring Welfare Q: How do we evaluate the performance of our institutions (e.g. markets)? A: We need some social-welfare criterion. Q: How can we. . . Find a monetary measure of a consumer’s utility/happiness? Evaluate a consumer’s willingness to pay for a unit of a good? Evaluate whether or not a market maximizes welfare without government intervention? Quantify the effect of economic policy on consumers? A: Use the concept of gains-from-trade
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Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium Market Demand Gains From Trade Example: Your friend took Econ 100B last spring and no longer need the text book. Values it at $10. You need one before you take Econ 100A. You value it at $160. It’s current allocation, with your friend, is inefficient. If you trade, there is a social gain of $160 - $10 = $150 Who benefits from this gain? How is this $150 distributed? That depends upon the terms of the trade. Institutions are rules/regimes we have for determining how goods are allocated. Markets are particular kinds of institutions, in which buyers and sellers meet and agree on terms the terms of trade. What the terms will be, what the outcome will be, depends upon the features of the market.
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Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium Market Demand Gains From Trade Examples: Suppose you had to pay to download iTunes, but once you did, you could buy as many songs as you like for $1. You have to pay a cover charge to get into a bar. Once you’re in, beers are $3.50 a pint. Costco sells cheap goods in bulk, but you have to pay a membership fee. What is the most you would pay to enter these markets? You would pay up to the dollar value of the gains-to-trade you would enjoy once in the market.
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Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium Market Demand Measuring Gains From Trade Q: How can we put a dollar value on a) the welfare gains resulting from a trade, or b) the change in consumer welfare resulting from a price/policy change?
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