ch02 - Chapter 2 Efficient Markets and Government 1...

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1 Efficient Markets and Government Chapter 2
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2 Positive and Normative Economics Positive Economics explains “what is,” without making judgments about the appropriateness of “what is.” Normative Economics: designed to formulate recommendations about what “should be.”
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3 Normative Evaluation of Resource Use: The Efficiency Criterion Pareto Optimality The efficiency criterion is satisfied when resources are used over any given period of time in such a way as to make it impossible to increase any one person’s well-being without reducing any other person’s well-being.
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4 Marginal Conditions for Efficiency Total Social Benefit Total Social Cost Net Benefit = TSB TSC Maximum Net Benefit occurs where MSB = MSC
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5 Figure 2.1 Efficient Output TSB MSC MSB Price, Benefit, and Cost (Dollars) Loaves of Bread per Month 0 A B Total Social Benefit and Cost 1.50 = P* Q* Q* = 15,000 E Q 1 = 10,000 2.00 = P 1.00 = P 2 B A Q 2 = 20,000 C D TSC Z TSB – TSC
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6 Conditions under which the Market is Pareto Optimal All productive resources are privately owned.
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