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This 3 page Class Notes was uploaded by Brie Burnett on Tuesday August 30, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by Banerjee in Fall 2016. Since its upload, it has received 9 views.
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Date Created: 08/30/16
9/15/16 Chapter 5: Efficiency and Equity Efficiency Allocative efficiency= resources are used where they are most highly valued Demand=Marginal Benefit Value Best alternative=Opportunity cost Supply=marginal cost MB>MC Inc Q MB<MC Dec Q MB=MC No change in Q Consumer & Producer Surplus Value Consumers receive over and above the price paid Area of below D and above P CS= Summation (MBP)= Change in ABC Summation over all quantity, the difference between MB & price= consumer surplus Producer Surplus= Summation (PMC)= Change in BCD Producer surplus is the area below price Value suppliers receive over and above MC of production Area below price and above supply Ex) P= 2Qd +12 P= ½ Qs +2 Calculate area of triangle: ½ b*h CS= ½ b*h CS= 1/2 (4)(124) CS= 2*8 CS=$16 PS= ½ b*h PS= ½ (2*4) PS= $4 Equilibrium At Equilibrium: (CS+PS) is maximized MB=MC Max (CS+PS) Over and Under Production Loss in efficiency Obstacles to efficiency 1. Price controls and quotas (Ch.6) 2. Taxes (Ch.6) 3. Lack of competition: Monopoly (Ch.10) 4. Externalities (Ch.13) External Costs, external benefits S=MC= Marginal Social Cost D=MB= Marginal Social Benefit (No external cost, no external benefit) 5. High transactions costs Dead Weight Loss (DWL): Decrease/loss of consumer and producer surplus from an inefficient level of production (underproduction) It’s not going anywhere, it’s a total loss in society Area of triangle, ADC, is the DWL DWL= ½ b*h The Big Trade Off Equity Symmetry Principle People in similar situations should be treated similarly Same treatment? same rules [ex) similar income= pay same taxes] Same outcome? same results Fairness Two options for fairness 1. Utilitarianism Achieve greatest happiness for the greatest number Assume that rich people value $1 less than poor people Mike has $70,000 MB of $1= 5 2. Maximin Principle Make the poorest person as well off as possible Tax the rich and redistribute to the poor (Administrative costs of taxtation)
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