Ch05-7e[1] - EFFICIENCY AND EQUITY 5 CHAPTER Self-Interest...

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EFFICIENCY AND EQUITY 5 CHAPTER
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Self-Interest and the Social Interest When you buy a pair of shoes or a textbook or fill your gas tank, or even just take a shower, you express your view about how scarce resources should be used. You make choices that are in your self-interest . Markets coordinate your choices with those of everyone else. Do markets do a good job? Do they enable our self-interest choices to be in the social interest? And do markets produce a fair outcome?
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Efficiency and the Social Interest Allocative efficiency is one aspect of the social interest and the aspect about which economists have most to say. An efficient allocation of resources occurs when we produce the goods and services that people value most highly. Resources are allocated efficiently when it is not possible to produce more of a good or service without giving up some other good or service that is valued more highly. Efficiency is based on value, and people’s preferences determine value.
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Efficiency: A Refresher Marginal Benefit Marginal benefit is the benefit a person receives from consuming one more unit of a good or service. We can measure the marginal benefit from a good or service by the dollar value of other goods and services that a person is willing to give up to get one more unit of it. The concept of decreasing marginal benefit implies that as more of a good or service is consumed, its marginal benefit decreases.
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Efficiency: A Refresher Figure 5.1 shows the decreasing marginal benefit from each additional slice of pizza, measured in dollars per slice.
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Marginal Cost Marginal cost is the opportunity cost of producing one more unit of a good or service. The measure of marginal cost is the value of the best alternative forgone to obtain the last unit of the good. We can measure the marginal cost of a good or service by the dollar value of other goods and services that a person is must give up to get one more unit of it.
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Ch05-7e[1] - EFFICIENCY AND EQUITY 5 CHAPTER Self-Interest...

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