INTRODUCTIONARY MICROECONOMICS - Efficiency__DWL_S1_2012_posted.pdfVIP

Lecture notes 07, Econ1001, Semester 1 2012, p. 1 Efficiency and deadweight loss Market Intervention and Efficiency Lecture notes 07, Econ1001, Semester 1 2012, p. 2 Outline Use consumer and producer surplus to explain why competitive markets allocate resources efficiently Discuss sources of market failure Discuss the effects of a price floor Discuss the effects of a price ceiling Discuss the effects of taxes and subsidies The incidence of a tax and elasticity Deadweight loss and elasticity Lecture notes 07, Econ1001, Semester 1 2012, p. 3 Outline Reading – TF chapter 7 JB case studies 2.7, 2.9 Lecture notes 07, Econ1001, Semester 1 2012, p. 4 Efficiency of the competitive market Recall: Supply and demand will force price to the equilibrium price When demand is () supply, price will tend to decrease (increase) Question is: Does the competitive market represent an efficient outcome? Lecture notes 07, Econ1001, Semester 1 2012, p. 5 A market for cappuccinos Lecture notes 07, Econ1001, Semester 1 2012, p. 6 Efficiency of the competitive market (cont) At the competitive equilibrium Resources are used efficiently The sum of producer and consumer surplus is maximised Pareto efficiency It is not possible to make someone better off without making someone worse off Recall the trade engaged in by Baz and Chloe in lecture notes 3 Lecture notes 07, Econ1001, Semester 1 2012, p. 7 Efficiency of the competitive market (cont) Efficiency requires The marginal benefit must equal the marginal cost for the last item produced The marginal cost of a good should be equal for every producer The marginal benefit of consuming the same good should be equal for all consumers What happens if one of these is violated? Consider if the marginal cost of a good is not equal for every producer Lecture notes 07, Econ1001, Semester 1 2012, p. 8 Effici