Chapter_7 - MarketandEfficiency MarketandEfficiency...

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Efficiency and Exchange Efficiency and Exchange
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Market and Efficiency Market and Efficiency Market outcomes are usually efficient.   Efficiency (Pareto Efficiency): no change  could be made to benefit one party without  harming the other.  Pareto Improvement: arrangements that could  make some better off without making anybody  worse off.  Different from engineering efficiency (using the  least amount of resources to do something).  Market equilibrium price and quantity are  generally efficient. 
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Price Below Equilibrium Price Below Equilibrium 2.50 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 2.00 1.50 1.00 0.50 D S
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Price above Equilibrium Price above Equilibrium 2.50 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 2.00 1.50 1.00 0.50 D S
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Maximize Total Surplus Maximize Total Surplus To maximize total surplus and achieve  efficiency, price of the good must be equal  to the marginal cost. 
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Efficiency Conditions Efficiency Conditions
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Trade-Offs Trade-Offs
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Policies Policies Price ceiling Subsidies for buyers First-come, first-served policy Tax policy
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Heating Oil Market Heating Oil Market D S 2.00 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 .80 1.40 8 Producer surplus Consumer surplus
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Price Ceiling on Heating Oil Price Ceiling on Heating Oil D S 2.00 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 1.60 1.20 1.0 0 0.80 1.80 1.40 8 Lost surplus Consumer surplus Producer surplus
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Surplus Lost to a Price Ceiling Surplus Lost to a Price Ceiling $800 underestimates surplus loss Consumers place different values on heating  oil If a person with a lower reservation price gets the  oil, there is additional surplus lost Shortages increase non-market costs Waiting in line Side payments
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Which one is better?
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