05_The Market and Government_

05_The Market and Government_ - The Market & The...

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1 The Market & The Government (Section 5) I. Economic Efficiency Two conditions for economic efficiency: 1. Activities that provide individuals with more benefits than costs must be undertaken 2. No activities where costs are greater than the benefits should be undertaken Marginal - Describes effects of a change in the current situation Marginal Costs (MC) - Increase in total cost from doing something a little bit more. (Cost of producing an additional unit of a product.) Marginal Benefit (MB) - Increase in total benefit from doing something a little bit more. [Maximum price a consumer would be willing to pay for an additional unit of a product] Net Benefit = Total Benefits – Total Costs
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2 Ex : Number of Times (Quantity) Total Benefit Marginal Benefit Total Cost Marginal Cost Net Benefit MB-MC 1 100 20 2 190 50 3 270 90 4 340 140 5 400 200 6 450 270 7 490 350 8 520 440 9 540 540 10 550 650 - At what quantity do we have economic efficiency? - What is the relationship between MB & MC at this quantity? Why does this have to be true? Graph MB & MC:
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3 - What does the MB curve remind you of? Why does this make sense? - What does the MC curve remind you of? Why does this make sense? - Where is economic efficiency on this graph? - What points on graph are not economically efficient? - Where is net benefit on this graph? II. We should not be perfect - Should we eliminate pollution? - Why don’t you clean your house perfectly every time?
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4 III. Possible functions of government 4 things government can do: *1. Protect individuals & their property from invasion from others *2. Provide goods that cannot easily be provided through private markets 3. Protect people from themselves 4. Redistribute income - Try to find something government could do that does not fall into one of these categories - In this class we will almost exclusively focus on #1 & #2 - We have discussed #1 lets focus on #2
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5 IV. Potential shortcomings of the market A. Lack of competition
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6 B. Externalities 1. Definitions & examples Externality - When someone outside the market (not involved in the trading) is affected. Negative externality (external costs) - When someone outside the market is hurt (bears costs) because market exists Exs - Positive externality (external benefits) - When someone outside the market benefits because market exists Exs - 2. A negative externality leads to overproduction of a good (More production than is economically efficient) A positive externality leads to underproduction of a good (Less production than is economically efficient)
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7 3. Examples a) Example 1 “Radio playing neighbor & radio hating neighbor” If the radio playing neighbor is willing to pay $50 (gets $50 net benefit from listening to music loudly) and The radio hating neighbor is willing to pay $100 not to listen to the
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05_The Market and Government_ - The Market & The...

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