Lecture+6+September+22

Lecture+6+September+22 - Todays Agenda More on Pareto...

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Today’s Agenda More on Pareto efficiency and the surplus measures Price ceilings and floors Or, how rent control can cause housing shortages abandoned apartment buildings racial discrimination Black markets
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Pareto efficiency • No feasible reallocation of inputs or outputs would make someone better off without making someone worse off.
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Necessary conditions for Pareto efficiency • Need to be on the PPC • Need to be at the right point on the PPC • Need to distribute total output so no consumer can be made better off without making another worse off Butter Guns
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Necessary conditions for Pareto efficiency • Need to be on the PPC • Need to be at the right point on the PPC • Need to distribute total output so no consumer can be made better off without making another worse off Butter Guns Focus here today: do markets produce the “right” amounts of all goods and services?
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Second efficiency requirement: Operate at “right” point on PPC • “Allocative efficiency” • Need to have the right mix of goods: MB social = MC social • P = MC for all goods is a necessary condition Butter Guns
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Second efficiency requirement: Operate at “right” point on PPC • “Allocative efficiency” • Need to have the right mix of goods: MB social = MC social • P = MC for all goods is a necessary condition Q $/Q S D
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Sum of surpluses is maximized at competitive equilibrium quantity Q $/Q S P D Consumer surplus Producer
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Sum of surpluses is smaller at all other quantities How could quantity be “too small”? What if price is set “too high”?
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Sum of surpluses is smaller at all other quantities How could quantity be “too small”? What if price is set “too high”?
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Sum of surpluses is smaller at all other quantities
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Sum of surpluses is smaller at all other quantities
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Sum of surpluses is smaller at all other quantities Q $/Q S P D Consumer surplus Producer
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Same issue can arise if price is prevented from rising to the equilibrium level Q $/Q S P D Consumer surplus Producer In each case, we lose a triangle of foregone surplus.
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Transferring a unit from a buyer at P to a non-buyer lowers surplus
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Obtaining a unit from a non-seller at P instead of an initial seller lowers surplus
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Necessary conditions for Pareto efficiency • Need to be on the PPC • Need to be at the right point on the PPC • Need to distribute total output so no
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Lecture+6+September+22 - Todays Agenda More on Pareto...

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