efficiency Flashcards
what is economic eff
where scare resources used most effeicint way to produce max output
stems from basic econ problem
the greatest possible level of infinite
wants is being met with those scarce resources
productive eff
This occurs when firms produce at the
lowest possible cost by making the best use of resources eg a car assembly plant is
using the latest technology
allocative eff
produce P=MC
- At eq max society surplus max CS PS basic econ problem 2 economic agnt cosumers producers in free market if allocation both happy where d=s If more less then there welfare loss max sS
- Net social benefit msb=msc max beyond sc more sb its not max nsb left silly sb more sc until q strt lose potential nsb
- Resources folllw demand no shortage or surplus d=s
how to show prod ef
PPC frontier use all existing resources also lowest AC curve
pareto optimality
no one can be better off without making someone worse off its best possible situation resources allocated in the most efficient way on PPC frotier not increase capital good without compromise consumer gods so Producers and consumers are better off
pareto improvement
opporutnity for bnefit.for example where at least one person is
made better off without making anyone else worse off. If there are
welfare losses at a particular point on the PPC, the reallocation of
resources will lead to Pareto improvement
eg turkey istanbul new airport consumers facility benefit fewer delays resident worse off noise pollution air quality.
dynamic efficiency
resources allocated effeciently over time meets the changing needs of its
market by introducing new production processes using their excess profits, firms are able to
engage in research, development and product innovation in order to
protect their market share. new technologies and lower pricethis investment can result in higher costs; the payback
comes later.Computer-aided
techniques and robots
negative productio ex
environmental pollution firm illegally disposes of toxic waste which emits toxic fumes ill health and respiratory problems global warming
plastic waste distress to marine creatures way into the food chain
negative production explaination
There is a misallocation of resources. The MEC increase as output
increases. MSC=MPC plus marginal external costs. MPC is the firm’s
supply curve.
There are no consumption externalities so the demand curve products is downward sloping. MSB=MPB equal to D.
The socially optimum output Q is where MSB equals MSC.
The actual output Q1 that is produced is where MPC equals MPB. This
means that output is above the optimum level. This overproduction
results in too much toxic waste being emitted by the factory. The
triangular area, xyz, is called the deadweight welfare loss due to this
overproduction
negative consumtion ex eg
passive smoking respiratory problems paid by their public health care programme
big sporting event untidy state with drinks cans and food cost to city authorities
Noise and anti-social behaviour from those attending the event impact on the lives of
residents . Extra
policing may be needed to ensure a peaceful situation returns to the area
after an event
negative consumption explain
MEC increases as output rise. MSB of the is lower than the marginal private benefit MPB. Assuming no
production externalities, the socially efficient level of output is at Q
where MSB equals MSC.
Due to the external costs of consumption, the level of output is at Q1 which is above the socially efficient level. The
deadweight welfare loss caused by overconsumption is shown by the
triangle xyz. In the case of passive smoking and from society’s point of
view, too much tobacco is being produced and consumed
Positive production externalitie eg
medical research vaccine is developed
wider benefits to others and to the economy. These benefits include
the greater output and productivity from having a healthy workforce
new trees are planted sell their crops.
The wider community will also benefit through a reduction in CO2 in
the atmosphere.
prodution postive explain externality
there are external benefits; these are shown by MEB. MSC is now below MPC. Assuming no consumption
externalities, MSB equals MPB. The socially efficient level of output is
at Q where MSB equals MSC. This is above what the output would be
in a competitive market. The external benefits result in a level of output
below the socially efficient level. There is underproduction at Q1. The
deadweight welfare loss is the triangle xyz and results from this
underproduction. This will only be removed when even more new trees
are planted.
Positive consumption externalitie
high school education
Their employment opportunities are greater. The benefits further extend to their families and to their
future economic prospects
If someone avoids serious
illness, then they are much more likely to be able to provide for their
family. A healthy population is also likely to raise living standards in
the economy and, in turn, a higher rate of economic growth.
positive consumption externality explain
the marginal social benefit MSB
is greater than the marginal private benefit MPB due to the positive
externalities referred to above. The gap between them is the marginal external benefit, MEB.
Assuming no external benefits of production, the level of output Q1 is
below the social optimum of Q. There is underconsumption of both
secondary education and free healthcare. The deadweight welfare loss is
the triangle xyz
assymetric info seller knows more buyer
because consumers
make choices based on imperfect information The quality of
information available to consumers varies and can lead to a
misallocation of resources
assymetric info
This situation applies in the market for used cars and scooters. Buyers
are often more concerned about the colour of the car, for example, and
not whether it has been repaired following an accident. . The
market has failed; poor quality cars and scooters have driven good
quality ones out of the market
Medical practitioners know far more about
medical conditions than their patients and are in a better position to be
able to advise what treatment should be given to their patients
buyer more info seller
The bank has to take a risk by assuming that the information provided by
you as the borrower is correct. After all, only the borrower knows
whether they will be able to pay back what is owed.
A similar situation applies in the insurance market where the seller has usually to accept the health details provided by the buyer. Some important details may
not be provided
adverse selection
seller has info buyer doesnt have on product quality or when buyers have info sellers dont have
Hidden characteristics, when only one party knows more about a
situation than the other party. An outcome of this situation is
adverse selection. For example, Buyers of used cars may end up
purchasing more low quality cars in the market, reducing the
market for good quality vehicles. As another example, unhealthy
people could purchase more life insurance than they need while
healthy people may not purchase any life insurance.
moral hazard
temptation to take risks when other party covers the risks
Hidden actions, when one party takes actions that the other party
cannot observe but which affect both of them. This may apply in
the case of a bank loan where the person who has obtained the loan
takes a bigger risk in setting up a business. With insurance, a
policy holder may attempt to do something that is prohibited by the
terms of the policy. These situations involving hidden actions are
known as moral hazard
CBA
its method of decision making take cost benefits
no need financial appraisal
1. long view comes from the nature of most public sector investment.
Because of the large sums involved, a project like a new road or rail
link is normally appraised over 30 to 50 years.
2. The wide view comes
from the need to take into account the full social costs and social
benefits.
example UK’s High Speed 2 (HS2) railway
First, it seeks to include all of the costs and
benefits, not just private ones.
Secondly, it often has to provide a
shadow price for costs and benefits where no market price is available.
For example, in the case of transport projects, there is a need to value
travel time savings. Other situations are how to value the benefit of
cleaner air or being able to live in a less noisy environment
steps of CBA
- identify all costs and benefits PC PB EC EB
- monetary value on all benefits and cost how to value cost savings
- forecast fututre cost and beenftis
- decision intrepret results highest net beenfit:cost
