ch12 - Chapter 12 Economic efficiency & public policy...

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Outline Allocative inefficiency and Total surplus o Exercise 12.1 : Calculating Total surplus o Exercise 12.2 : Calculating Total surplus at the efficient allocation Efficiency of market structure Promoting efficiency using public policy Allocative inefficiency and Total surplus Producer surplus is Revenue (P×Q) – Variable cost (VC) the same as Profits + Fixed costs. (i) Area below price line equals P×Q (ii) Area below industry supply curve equals VC. Total surplus is Total value (TV) – Variable cost (VC). (i) Area below industry demand equals TV (ii) Area below industry supply equals VC. CS + PS = [TV – P×Q] + [P×Q – VC] = TV – VC = TS Note : Assumes no taxes (i.e. P = P B = P S ). (i.e. serve all buyers willing to pay MC). Allocative efficiency occurs if total surplus is maximized all buyers willing to pay MC are served. EC120
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This note was uploaded on 01/17/2012 for the course ECONOMICS 120 taught by Professor Mesta during the Fall '10 term at Wilfred Laurier University .

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ch12 - Chapter 12 Economic efficiency & public policy...

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