Econ Micro. Chapter 14: Economic Efficiency And The Competitive Ideal

Front 1

Economic efficiency

Back 1

Achieved when all activities that can make
at least one person better off without
making anybody else worse off are taking
place

Front 2

Pareto improvement

Back 2

An action that makes at least one person
better off and harms no one

Front 3

A situation of economic efficiency

Back 3

A situation in which every possible Pareto
improvement is being exploited

Front 4

If an action creates greater total gains for
some than total losses to others...

Back 4

Then a side payment exists which, If transferred from the gainers to the
losers, would make the action a Pareto
improvement

Front 5

• Productively efficient economy

Back 5

Operates on its production possibilities frontier (PPF)

Front 6

Productive efficiency

Back 6

is a necessary but not sufficient condition for economic efficiency.

Front 7

To become economically efficient,

Back 7

an economy must produce a mix of goods and distribute them n a way that exploits all pareto improvements.

Front 8

Market economies

Back 8

-tend to be PRODUCTIVELY efficient

-are economically efficient if trading takes place in perfectly competitive markets

Front 9

In competitive markets, the Height of the market demand curve

Back 9

At any quantity shows us the value (to
someone) of the last unit of the good
consumed

Front 10

In a competitive market, the height of the market supply curve

Back 10

-At any quantity shows us the additional
cost (to some producer) of the last unit of
the good supplied
– Minimum price a seller must get in order to
supply that good

Front 11

In Competitive Markets, Whenever the demand curve is higher than the supply curve at some quantity

Back 11

The value of one more unit to some
consumer is greater than its additional cost
to some producer,

We can always find a price for one more unit
that makes both the consumer and the
producer better off (Pareto improvement)

Front 12

In a competitive market, the efficient quantity of a good

Back 12

Is the quantity at which the market D and the market S curve intersect

Front 13

a well-functioning perfectly competitive market

Back 13

Will automatically achieve the efficient
quantity

Front 14

In a competitive market, a good is allocated efficiently

Back 14

when units are consumed by those who value them most.

Front 15

A well-functioning, perfectly competitive market,

Back 15

will automatically achieve efficient allocation of a good among its consumers

Front 16

The value of a good

Back 16

what a buyer is willing and able to pay for something. Depends on how much income or wealth they have at their disposal.

Front 17

For any given distribution of income and wealth among households

Back 17

Pareto improvements should be exploited,
an efficient outcome is better than an inefficient outcome

Front 18

Consumer surplus

Back 18

The difference between the value of a unit of good to a buyer, and what the buyer actually pays for it

Front 19

Market consumer surplus

Back 19

Total consumer surplus enjoyed by all
consumers in a market

Total area under the market demand curve
and above the market price ($/period of
time)

Front 20

Market gains: Producer surplus

Back 20

The difference between what the seller actually gets for a unit of good,

And the cost of providing it.

Front 21

Market producer surplus

Back 21

–Total producer surplus gained by all sellers
in a market

-Total area above the market supply curve
and below the market price ($/period of
time)

Front 22

Total benefits gained in a market

Back 22

Sum of the consumer and producer surplus in the market

Front 23

A market is efficient

Back 23

when total benefits are maximized

Front 24

Imposing a price ceiling below the equilibrium price

Back 24

Lowers the quantity sold

Total benefits fall
-producer surplus decreases
-consumer surplus can increase or decrease

Deadweight loss

Front 25

Imposing a price floor above market equilibrium

Back 25

Lowers the quantity sold

Total benefits fall
-Consumers surplus declines
-Producer surplus may increase or decrease
-Deadweight loss baby

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Some degree of market power

Back 26

Some degree of market power
Set their price to maximize profits
-Monopolist
-Oligopolists
-Monopolistic competitors

Front 27

Monopolistic and imperfectly competitive markets

Back 27

Firms charge a single P>MC on all units

are generally inefficient

Cannot maximize total market benefits
-Price is too high
-Output is too low

Front 28

Impact of an excise tax on a competitive market

Back 28

-Supply shifts upward
-Lower Q
-P paid by consumers is higher
-P received by producers is lower
– Consumer surplus decreases
–Producer surplus decreases

Total benefits decrease: loss in benefits to
buyers and sellers > than the gain in
government revenue

• Total benefits = consumer surplus + producer
surplus + government tax revenue

-Deadweight loss, baby

Front 29

Taxes

Back 29

All else equal, create smaller deadweight loss when they imposed on markets in which demand or supply is relatively inelastic

Front 30

Market for land

Back 30

Vertical supply curve

Downward-sloping demand curve

Front 31

A Land tax

Back 31

Demand curve shifts downward
– Renters end up paying the entire tax
–Same rent (after tax) paid by renters
– Lower rent received by land owners
– No deadweight loss

Front 32

Problems with land tax today

Back 32

To avoid deadweight loss, the tax would
have to be on the value of the land only,
excluding the value of any improvements
made to it
• Smaller tax base

Current landowners would be harmed
• Lower-than-expected rate of return on their
investment
• Capital loss if they try to sell their land