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Topic07 - Market equilibrium and efficiency 7 Efficiency...

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1 7. Efficiency and exchange Market equilibrium and efficiency A market equilibrium is efficient A situation is efficient (or Pareto efficient) if there is no opportunity for exchange or trade that will make at least one person better off without harming others. Markets will be efficient when Buyers and sellers are well informed. Markets are perfectly competitive. Supply measures all relevant costs. Demand measures all relevant benefits. A Pareto-improving transaction where the ruling market price is below its equilibrium level 2.50 Quantity (1000s of litres/day) Price ($/litre) 1 2 3 4 5 2.00 1.50 1.00 .50 D S Market equilibrium and efficiency Observations on efficiency When price is above or below the equilibrium, the quantity exchanged will be below the equilibrium. The vertical value on the demand curve (marginal benefit) is greater than the vertical value on the supply curve ( MC ). Only the equilibrium will maximise economic surplus. Market equilibrium and efficiency Efficiency: the first but not the only goal. What do you think? Is efficiency the only goal? Why should efficiency be the first goal? The cost of preventing price adjustments Price ceilings: Do they help the poor? An example How much waste does a price ceiling on milk cause?
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