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05ECO100OutlineEfficiency

# All costs of producing and giving up the item are

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. All costs of (producing and) giving up the item are borne by agent S . If assumption BIG holds, then Surplus= Gazzale (University of Toronto) ECO100: Efficiency 4 / 16

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Surplus and Efficiency Assumption BIG 1 This lecture, we assume assumption BIG 2 Assumption BIG does not hold in many interesting cases A litre of gasoline A college education Gazzale (University of Toronto) ECO100: Efficiency 5 / 16
Surplus and Efficiency Transactions with a transfer of money as well? Single Transaction: S gives B an item, B gives S \$P Surplus = ( WTP - P ) | {z } consumer surplus + ( P - Cost ) | {z } producer surplus = WTP - Cost Gazzale (University of Toronto) ECO100: Efficiency 6 / 16

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Surplus and Efficiency Efficiency 1 An allocation is efficient if it maximizes total surplus. Total Surplus Sum of surplus created in each individual transaction 2 What we want: any and all transactions where MSB MSC , and only those transactions. Remember If I take from high MWTP (e.g., MWTP = 12) and give to low MWTP (e.g., MWTP = 2), this transaction destroys surplus (e.g., 2-12=-10) Gazzale (University of Toronto) ECO100: Efficiency 7 / 16
Surplus and Efficiency Efficiency, Graphically Benefits ordered high to low; Costs ordered low to high Gazzale (University of Toronto) ECO100: Efficiency 8 / 16

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Efficiency and the Free Market The Perfectly Competitive Free Market is Efficient Assuming Assumption BIG and a couple of others . . . Gazzale (University of Toronto) ECO100: Efficiency 9 / 16
Result Implications Implications Surplus generated by taking stuff from “low value” S ’s and transferring to “high value” B

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