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MARKET FAILURE AND GOVT INTERVENTION > WHAT IS ALLOCATIVE EFFICIENCY > Flashcards

WHAT IS ALLOCATIVE EFFICIENCY Flashcards

1
Q

@ free market equilibrium there is an

A

efficient allocation of scarce resources

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2
Q

draw a diagram w effieicnet allocaiton of scarcer reources

A

y axis = price/costs/benefits

x axis = quantity

s = mpc = msc

d= mpb = msb

demand and supply cross at perfection of p* q*

label cs & ps

title - efficient allocation of scarce resources

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3
Q

supply is equal to

A

marginal private cost

marginal social cost

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4
Q

what is private cost

A

cop for a producer

e.g gas and electricity

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5
Q

what does marginal mean in PRODUCTION CASE
**

A

extra cost of producing one extra unit

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6
Q

the supply curve here is upward sloping due to the

A

law of diminishing marginal returns

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7
Q

explain why the supply curve is upward sloping

A

if mc increase everytime and therefore the next unit is more expenisev

suppliers want a higher price each time to produce extra units to cover costs and make profit

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8
Q

how do we calculate social cost / what is it made of and means

A

private costs + external costs

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9
Q

what are external costs

check definition

A

impacts on 3rd parties not involved in the transaction

but effected by production of a good

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10
Q

if a 3rd party is impacted by external costs negatovley how does this effect the social cost equation

A

EC are real

they exist more

so it becomes a positive figure

sc are now higher than private COSTS

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11
Q

if a 3rd party is impacted by external costs positivley how does this effect the social cost equation

A

they exist less so are negative

and this brings down the social cost

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12
Q

WHY DOES S = MPC = MSC only

2 points

A

We assume in a free market that’s operating well and being allocativley efficient

that there’s no external costs at all

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13
Q

demand is equal to

A

Marginal Private benefit

Marginal Social Benefit

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14
Q

what are private bebenfits in consumption terms

A

individual consumer benefits/satisfaction achieved from consuming

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15
Q

what is marginal in the DEMand sense

A

extra benefit achieved from consuming one more unit of a good

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16
Q

why is MPB downward sloping

A

law of dimininshing marginal utility

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17
Q

whats the law of diminishing marginal utility

A

less satisfaction is gained form the previous unit as you increase consumption

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18
Q

social benefit =

A

private benefit + external benefit

19
Q

what is an external beenfit of consumption

A

an imapct on a 3rd party due to consumption

20
Q

if an EB/impact is +Ve on a 3rd party due to consumption what is the effect ont he SB equation

A

EB figure will be positive

meaning social benefits will be greater than private benefits

21
Q

if an external benefit/ impact on 3rd party due to production is negative what is the effect on the SB equation

A

consumption harms the 3rd party so eb becomes -ve so brings down SB compared to pb

22
Q

in a free market operating competitivley and allocating resources well what do we assume about consumption

A

no externalities in consumption at all

so

D= MPB= MSB

23
Q

Allocative efficiency occurs when what 3 things gtake place

A

Maximisation of Society Surplus

Maximisation on Net Social Benefit

Where resources perfectly follow consumer demand

24
Q

society surplus is the sumof

A

consumer surplus + producer surplus

25
Q

MAX OF SOCIETY SURPLUS - basic eocn problemis

A

how ro allcoate scarce reosurces given unlimited wants

26
Q

MAX OF SOCIETY SURPLUS - who ar ethe tw most improtant economic agents in a free market

A

consuers who have the wants and producers who can produce output to satisfy these wants

27
Q

MAX OF SOCIETY SURPLUS - When can we not be doing any better w allocation of scarce resources

Hint agents

A

if in aosr both agents are as happy as possible

28
Q

MAX OF SOCIETY SURPLUS - when do we have this

talkign about a certain section on the graph

A

triangles representing consumer and producer surplus are the greatest they canbe

29
Q

MAX OF SOCIETY SURPLUS - when is consumer surplus maximised on the grapgh

A

d=s i.e equilibrium at p* and q*

cs+ ps = big triangle

30
Q

MAX OF SOCIETY SURPLUS - the triangle of society surplus on our grpah is greatest size we cna obtia IN A FREE MKT
what happens if we move ht eprice above or below

A

There’ll be aloss of welfare compared to the size of the triangle

31
Q

MAXIMISATION OF NET SOCIAL BENEFIT - where does this occur

in a free mkt htis is happening at

assuming we have

A

where MSB=MSC

in a free market this is happening at equilibrium

assuming we have no EC/EB S=MSC D=MSB are both equal to each other

32
Q

MAXIMISATION OF NET SOCIAL BENEFIT - explain how were not maximing social beenfit when move beyond( to the right) of Q*

A

if we produce at any quanittiy beyond Q* our SC are higher than out SB therfore we are not maximising our net SB as this q causes it to reduce

33
Q

MAXIMISATION OF NET SOCIAL BENEFIT - explain how were not maxing social beenfit when we move to the left of Q*

A

silly to stop there as social beenfit will always be greater than social cost up until Q

so stoping at any Q below q* means we loose out on potential net social benefit by not producing those units

so we keep producing to add more benfots than costs which keep happening up till Q*

therfore equilibrium is at MSC=MSB we’re maxing net SB as we cant gain anymore and not loosing any

34
Q

WHERE RESOURCES PERFECTLY FOLLOWING CONSUMER DEMAND - What does this mean

no

no

no

this happens at …. in mkt

A

no excess supply

no excess demand

no shortages

This happens ar equilib price in mkt

35
Q

WHERE RESOURCES PERFECTLY FOLLOWING CONSUMER DEMAND - in a free market at p* everything being produced by producers is being … and …

there are no …

A

demanded and able to be bought by consumers

there are no surpluses and shortagrs

36
Q

WHERE RESOURCES PERFECTLY FOLLOWING CONSUMER DEMAND - we find thers a perf allocation of scarce resources @ p* explain what this means

at this price …

so

A

@ this price exactly what’s being produced is following consumer demand perfectly

so s= d

so we’re achieving point of this para

37
Q

We solve the basoc econ problem w the three points made but onteh basis of 5 assumptions

state them

hint- similar to perfect competiton

A

many buyers and seller

perf info for C&P

no barriers to entry/exit - so firms can compete/leave if theu want to

firms are profit maxers

consumers are utility maximiser s

38
Q

If any of assumption break down waht can this cause

A

it canbe a source of mkt failure whereby mkt equilib isnt at the allocativley efficient point

39
Q

overall mkt equilib occurs at

A

MPC = MPB (S=D)

THIS IS THE PRIVATE OPTIMUM

40
Q

If assumption breaks down there may be a difference between

A

private optimum and social optimum

41
Q

what is the social optimum

A

MSC =MSB

42
Q

Why is the social optimum/ msc=msb allocativley efficient

its maximisation of

where

as we assume

A

because its the maximisation of net social benefit

where msc - msb is where mpc = mpb

as we assume no external costs and no external beenfits

43
Q

when one of our assumptions break down what do we drop

A

our other assumption that there are noe xternal costs and benefit

MARKET FAILURE AND GOVT INTERVENTION (11 decks)

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