Econ1101_W7 - Econ 1101 Microeconomics Efficiency and...

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Econ 1101 Microeconomics Efficiency and Exchange Lecturer: Scott French Reading: Frank, Jennings, & Bernanke – Ch. 7 29/08/2011 Econ 1101 - Microeconomics 7-1
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Outline Define efficiency The efficiency of the market equilibrium The costs of market interventions Price ceilings and floors Taxes and subsidies Who pays a tax? Are some taxes more efficient than others? 29/08/2011 Econ 1101 - Microeconomics 7-2
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Efficiency Efficiency: a situation in which there is no opportunity to make one person better off without harming others. also called Pareto efficiency . Pareto-improving transaction: a trade or exchange that makes someone better off without harming others 29/08/2011 Econ 1101 - Microeconomics 7-3
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Efficiency in the Milk Market Suppose the price of milk is $1/litre. Is there a Pareto-improving transaction? 29/08/2011 Econ 1101 - Microeconomics 7-4 S D P ($) Q (1000s of litres / day) 0 1.50 1.00 0.50 2.00 2.50 2 3 4 5 1
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Efficiency in the Milk Market Suppose the price of milk is $2/litre. Is there a Pareto-improving transaction? 29/08/2011 Econ 1101 - Microeconomics 7-5 S D P ($) Q (1000s of litres / day) 0 1.50 1.00 0.50 2.00 2.50 2 3 4 5 1
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Market Equilibrium and Efficiency The market price is the only price for which there are no Pareto-improving transactions . The market equilibrium is efficient when: 1. Buyers and sellers are well informed 2. Markets are perfectly competitive 3. Supply measures all relevant costs 4. Demand measures all relevant benefits 29/08/2011 Econ 1101 - Microeconomics 7-6
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Efficiency Does this mean everyone is happy with the market equilibrium allocations? Efficiency does not mean equity (fairness) is achieved. The opportunity cost of greater equity is inefficiency. How do we measure the costs of inefficient
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Econ1101_W7 - Econ 1101 Microeconomics Efficiency and...

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