xid-6202982_2 - Thurs Sept 22 From TuesdayDiscounting...

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T hurs., Sept 22 From Tuesday……Discounting example 1. Efficiency conditions static efficiency– at a specific point in time, or when time is not a consideration dynamic efficiency - over time I n an efficient competitive market: Property rights are clearly defined - all resources & factors of production are privately owned - all costs and benefits accrue to owners and users of resources so…. Social costs and benefits are equal to private costs and benefits - property rights can be voluntarily transferred (exchanged) - property rights are enforceable firm's price = MR = MC; market P = MR; individual firms have no effect on market price; Each individual firm is a price taker ie, takes the market price as given If…. Demanders are the only beneficiaries of the good… Market demand curve represents marginal social benefit If…. Suppliers are the only ones to incur production costs…. Market supply curve represents marginal social cost of production In this case, at equilibrium…. 1
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marginal private benefit (MPB) = marginal private cost (MPC) and marginal social benefit (MSB) = marginal social cost (MSC) In equilibrium, demand = supply, Represents efficient use of society's resources And…. Total surplus (CS + PS) is maximized. Impossible to increase total surplus by reallocation of the good - Pareto efficiency . But….what if some of these conditions do not hold? 2. May result in market failure When market operation does not result in Pareto efficient outcome: - in which a market fails to allocate resources efficiently; likely to occur when: Private costs of production are not equal to social costs or… Private benefits are not equal to social benefits;
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xid-6202982_2 - Thurs Sept 22 From TuesdayDiscounting...

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