L4. Efficiency with questions

L4. Efficiency with questions - EconomicEfficiency n...

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Economic Efficiency n Static Efficiency q Choose output to maximize net benefits to society q Net Benefits to Society comprise n Total Social Benefits-Total Social Costs q How can we measure or compare Social Benefits and  Social Costs? By using n Marginal Social Benefits=Aggregated individual benefits  q Total Social Benefits = Area under Marginal Social Benefits n Marginal Social Costs=Aggregated individual costs q Total Social Costs=Area under Marginal Social Costs
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Illustrating static efficiency n Total Benefits at q*=a+b n Total Costs at q*=b n Net benefits=a n Total Benefits at q1=? n Total Costs at q1=? n Net benefits=? n Condition for Maximum:  MSB=MSC q At any earlier point marginal  benefit is greater so output should  be increased q At any later point marginal cost is  greater, thus output should be  decreased. Costs and Benefits Quantity of Output MSC a b c d q* q1 MSB
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Dynamic (Intertemporal Efficiency) n Maximize present value of net benefits q Benefits and costs include future benefits and costs. n Not just a simple addition of net benefits across  different years.  q Trade-off: a decision increasing the net benefits in the  present period often decreases net benefits in the  future.
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Dynamic Efficiency n Present value of net benefits = Net benefits this period 
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This note was uploaded on 11/18/2011 for the course ECON 374 taught by Professor Sumeetgulati during the Winter '11 term at The University of British Columbia.

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L4. Efficiency with questions - EconomicEfficiency n...

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