L24 - The Efficiency of Markets Flashcards
What are the two main components of whether something is socially desirable?
1) Efficiency
2) Fairness/ Equity
What is Productive Efficiency?
Firm operates at the minimum AC, choosing appropriate inputs and productive maximum output possible
Implies:
- Least costly CELL used
- Exploit E of S (Close to min efficient scale)
- Best available tech and most efficient production processes
What is Allocative Efficiency?
Where resources allocated to good and services, society most values
How did Pareto Optimality and Improvements come about?
19th century economist named Vilfredo Pareto was one of the first economists to define what a social planner may perceive as an efficient allocation of resources
What is a Pareto Optimality?
Where a given allocation of resources is not possible to make one person better off without making another
person worse off
What is a Pareto Improvement?
Where a given allocation of resources it is possible to make one person made better off without making
another worse off
At a Pareto optimal allocation of resources, there are no Pareto improvements to be made
When does Private Efficiency occur?
If Marginal Private Benefit (MPB) = Marginal Private Cost (MPC)
When does Social Efficiency occur?
If Marginal Social Benefit (MSB) = Marginal Social Cost (MSC)
Why is there social and private efficiency in a perfectly competitive market?
Because,
MSB = MPB = P = MPC = MSC
1) All markets will generally be privately efficient
2) Markets are socially efficient when the trade has no effect on 3rd parties
Why is Social Efficiency the same as Pareto Optimality?
If MSB > MSC, there is a Pareto improvement from increasing the activity
What is an Edgeworth Box and what can we use these to show?
An Edgeworth box depicts every possible outcome from trade between Person X and Person Y.
Can be used to display Pareto Optimalities and Pareto Improvements.
