110Ch05 - Chapter 5: Efficiency & Equity Objectives...

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Describe the alternative methods of allocating scarce resources Explain the connection between demand and marginal benefit and define consumer surplus Explain the connection between supply and marginal cost and define producer surplus Explain the conditions under which markets move resources to their highest-value uses and the sources of inefficiency in our economy
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Self-Interest and Social Interest When you buy a pair of shoes or a textbook or fill your gas tank, or even just take a shower, you express your view about how scarce resources should be used. You make choices that are in your self-interest. Markets coordinate your choices with those of everyone else. Do markets do a good job? Do they enable our self-interest choices to be in the social interest? And do markets produce a fair outcome?
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Resource Allocation Methods Scare resources might be allocated by using any or some combination of the following methods : Market price Command Majority rule Contest First-come, first-served Sharing equally Lottery Personal characteristics Force How does each method work?
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Resource Allocation Methods Market Price When a market allocates a scarce resource, the people who get the resource are those who are willing to pay the market price. Most of the scarce resources that you supply get allocated by market price. You sell your labor services in a market, and you buy most of what you consume in markets. For most goods and services, the market turns out to do a good job.
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Resource Allocation Methods Command Command system allocates resources by the order (command) of someone in authority. For example, if you have a job, most likely someone tells you what to do. Your labor time is allocated to specific tasks by command. A command system works well in organizations with clear lines of authority but badly in an entire economy.
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Resource Allocation Methods Majority Rule Majority rule allocates resources in the way that a majority of voters choose. Societies use majority rule for some of their biggest decisions. For example, tax rates that allocate resources between private and public use and tax dollars between competing uses such as defense and health care. Majority rule works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently.
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Resource Allocation Methods Contest A contest allocates resources to a winner (or group of winners). The most obvious contests are sporting events but they occur in other arenas: For example, The Oscars are a type of contest. Contest works well when the efforts of the “players” are hard to monitor and reward directly.
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Resource Allocation Methods First-Come, First-Served A first-come, first-served allocates resources to those who are first in line. Casual restaurants use first-come, first served to
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This note was uploaded on 05/21/2011 for the course ECON 110 taught by Professor Tan during the Spring '07 term at HKUST.

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110Ch05 - Chapter 5: Efficiency & Equity Objectives...

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