ECON 1001_2010_Week 5_lecture_5

ECON 1001_2010_Week 5_lecture_5 - Lecture 5: Competitive...

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1 Lecture 5: Competitive Markets and Market Efficiency
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2 Food for Growth IV : Evaluating beliefs based on whether they are true or false is not helpful; Evaluate beliefs based on whether or not they are resourceful (Bill Harris)
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3 Topic Outline Part I: Pareto Efficiency and sources of market failure Explain why competitive markets move resources to their highest-valued uses Discuss Price floor (Revision of Lecture 2.4) Price ceiling (Revision of Lecture 2.4) Deadweight loss Part II:Taxes and subsidies The incidence of a tax and elasticity Deadweight loss and elasticity
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4 Pareto Efficiency A situation in which it is not possible A situation in which it is not possible to make someone better off without to make someone better off without making someone else worse off making someone else worse off
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5 Conditions for Efficient Economic Outcomes MB must equal MC for the last item MB must equal MC for the last item produced produced MCs of a good should be equal for MCs of a good should be equal for every producer every producer MBs of consuming the same good MBs of consuming the same good should be equal for all consumers should be equal for all consumers
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6 F D E Efficiency of the Market P Q S Mkt Derived from Derived from firms’ MCs firms’ MCs D Mkt Derived from Derived from consumers’ MBs consumers’ MBs Too little Too little Efficient Efficient Too much Too much
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7 Sources of Inefficiency Taxes, subsidies, and quotas With a tax or subsidy, the amount paid by consumers is no longer the amount received by firms Petrol, alcohol, tobacco A quota is a restriction on the maximum quantity a firm can produce and sell Import quotas
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8 Sources of Inefficiency Monopoly A monopolist restricts output and raises price relative to a competitive firm Public goods Public goods are goods or services for which one person’s consumption does not detract from another’s consumption Defence, police, bus rides, roads (up to a point) Markets suffer from a free rider problem
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9 Sources of Inefficiency External costs and benefits Costs or benefits imposed on individuals other than the consumer or producer of a good or service Pollution from a factory Listening to your stereo on full volume Public education Marginal benefit (demand) curves and marginal cost (supply) curves do not reflect society’s costs or benefits
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10 Sources of Inefficiency Imperfect information We have assumed Consumers know the quality of all products Consumers know the prices of all substitutes and complements Producers know exactly their costs of production Producers know the prices and production costs of all substitutes in production
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ECON 1001_2010_Week 5_lecture_5 - Lecture 5: Competitive...

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