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 ² 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 ² Buyers and sellers are well informed. ² Markets are perfectly competitive. ² Supply measures all relevant costs. ² 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) 12345 2.00 1.50 1.00 .50 D S Market equilibrium and efficiency ± Observations on efficiency ² When price is above or below the equilibrium, the quantity exchanged will be below the equilibrium. ² The vertical value on the demand curve (marginal benefit) is greater than the vertical value on the supply curve ( MC ). ² Only the equilibrium will maximise economic surplus. Market equilibrium and efficiency ± Efficiency: the first but not the only goal. ± What do you think? ² Is efficiency the only goal? ² Why should efficiency be the first goal? The cost of preventing price adjustments ± Price ceilings: Do they help the poor? ² An example ³ How much waste does a price ceiling on milk cause?
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2 Producer surplus = $900/day Consumer surplus = $900/day D S Economic surplus in an unregulated market for milk 2.00 Quantity (1000s of litres/day) Price ($/litre) 12345 1.60 1.20 1.00 .80 1.80 1.40 8 Without price controls: Equilibrium Price = $1.40 Consumer surplus = (1/2)(3000)(.60) = $900/day Producer surplus = (1/2)(3000)(.6) = 900/day Economic surplus = $1800/day Producer surplus = $100/day Lost economic surplus = $800/day Consumer surplus = $900/day The loss of economic surplus caused by a price ceiling in the market for milk 2.00 Quantity (1000s of litres/day) D S 1.60 1.20 1.00 .80 1.80 1.40 8 With price ceiling: Producer surplus = (1/2)(1000)(.20) = $100/day or a loss of $800/day Economic surplus = $1000 or a loss of $800/day Price ceiling set at $1.00 Price ceilings and price floors ± Illustrating CS, PS and efficiency loss in general terms ± Overhead Taxes and efficiency ± Question ² Who pays a tax imposed on sellers of a good?
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This note was uploaded on 08/29/2011 for the course ECON 1101 taught by Professor Janegoley during the Three '08 term at Australian National University.

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Topic07 - Market equilibrium and efficiency 7. Efficiency...

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