Week 5: Efficiency & Equity Flashcards
What are the alternative methods of allocating scarce resources?
- Market price
- Command
- Majority rule
- Contest
- First-come, first-served
- Lottery
- Personal characteristics
- Force (negative and positive)
Why is a demand curve a marginal benefit curve?
Demand is determined by willingness to pay. Marginal benefit is the the maximum price willingly paid for the another unit of a good or service.
What is a market demand curve or marginal social benefit curve (MSB)?
It is the relationship between the price of a good and the aggregate quantity demanded, derived from the horizontal sum of the individual quantities demanded.
What is the total benefit?
It is the sum of the marginal benefits from consuming each unit of a good calculated as the area under the demand curve between Q=0 and Q=X.
What is a consumer surplus?
It is the excess of the benefit received from a good over the amount paid for it calculated as the value or marginal benefit of a good minus its price, summed over the quantity bought.
It is equal to the area under the demand curve and above the market price between Q=0 and Q=X.
What is a market consumer surplus?
The sum of the individual consumer surpluses
Why is a supply curve a marginal cost curve?
Supply is determined by the minimum supply price. Marginal costs is the minimum price producers must receive to make them sell another unit of a good or service.
What is a market supply curve or marginal social cost curve (MSC)?
It is the relationship between the price of a good and the aggregate quantity supplied, derived from the horizontal sum of the individual quantities supplied.
What is the difference between variable costs and fixed costs?
Variable costs vary depending on the quantity of the good or service produced. Fixed costs remain constant.
What is the total variable cost (TVC)?
The sum of the marginal costs of producing each unit of a good calculated as the area under the supply curve between Q=0 and Q=X.
What is a producer surplus?
It is the excess of the amount received from the sale of a good or service over the cost of producing it calculated as the price received minus the marginal cost, summed over the quantity sold.
It is equal to the revenue minus the variable cost or the area under the market price and above the supply curve between Q=0 and Q=X.
What is a market producer surplus?
The sum of the individual producer surpluses
What is the total surplus (TS)?
The sum of the consumer surplus and the producer surplus, indicating the total gains from trade generated by the market
When does a competitive market achieve allocative efficiency?
When it maximises the total surplus and the marginal social benefit equals the marginal social cost, goods are allocated to consumers who value them most highly and supplied by producers with the lowest costs.
When does a market failure occur?
When total surplus is not maximised due to underproduction or overproduction
What is a deadweight loss?
It is the size of the market failure or scale of inefficiency (measured in dollars), which is the decrease in the total surplus generated by the market.
What are the sources of market failure?
- Price and quantity regulations, which lead to underproduction
- Taxes, which lead to underproduction, and subsidies, which lead to overproduction
- Externalities- external cost (overproduction) and external benefit (underproduction)
- Public goods (market underproduces due to free-riding) and common resources (overused)
- Monopoly- produces too little and charges too high a price (underproduces)
- High transaction costs- market underproduces
What are the two big approaches to thinking about fairness?
- It’s not fair if the result isn’t fair.
2. It’s not fair if the rules aren’t fair.
What is the utilitarian idea of fairness and what is wrong with it?
Utilitarianism is the idea that only equality brings efficiency and income must be transferred from the rich to the poor to achieve the “greatest happiness for the greatest number.” It ignores the costs of making income transfers.
What is the big tradeoff between efficiency and fairness?
The greater the amount of income redistribution through income taxes, the greater the inefficiency, and the smaller the economic pie. The goal is to make the poor as well off as possible, despite having an unequal share.
What is the symmetry principle?
The requirement that people in similar situations be treated similarly
What is equality of opportunity?
Despite an unequal share of the economic pie, people must voluntarily exchange services for their share of the pie offered in compensation.
What are the two rules that fairness obeys?
- The state must enforce laws that establish and protect private property.
- Private property must be transferred from one person to another only by voluntary exchange.
What is the area of a triangle?
bh/2
