Ag Econ chapter 7

welfare economics

evaluating market efficiency and market failure

Positive analysis

describes what is happening, explaining why, or predicting what will happen

Normative analysis

prescribes what should happen which involves value judgements (more option based)

Economic efficiency

an outcome is more economically effiecient if it yields more economic surplus

efficiency outcome

the efficiency outcome yields the largest possible economic surplus

efficiency and equity

assess the size of the economic pie and how it is sliced

will everyone be happy with efficient outcome

not just overall

equity

a measure of fairness

consumer surplus

the economic surplus you get from buying something, describes the gain from buying something at a price below the highest price you were willing to pay

when do you not earn consumer surplus

all but your last purchase

producer surplus

the economic surplus you get from selling something, gain from selling something at a price above the orginal cost you incur from producting a good

voluntary exchange

buyers and sellers exchange money for goods only if they both want to

does voluntary exchange guarantee equal gains

no they both gain but it might not be equal

dead weight lost

surplus from transactions that never occured (usally due to limitation put on by the government)

economic surplus

consumer and producer surplus added together

does market based economics or centrally planned economies yield more efficient outcomes

market-based economics

efficient production

producing a given quantity of output at the lowest possible cost

equimarginal principle

when producing a good you have to ask where it will be cheaper to produce each good on the margin

efficient allocation

allocating goods to create the largest economic surplus, each good goes to the person who will get the highest marginal benefit from it

efficient quantity

the quantity that produces the largest possible economic surplus

5 main sources of market failure

market power, externalities, info. problems, irrationality, government regulations

how can market power lead to failure

market power undermines competitve pressure, if their is not many sellers then they can exploit the price and that means less buyers

what do externalities create

side effects, whenever the choices that buyers and sellers make have side effects on others

what do info. problems undermine

trust

private information

information that one party has but the other does not

what does irrationality lead to

bad decisions, not in their best intrest, do not follow rational rule for sellers

how do we find dead weight loss

economic surplus at efficient outcome minus actual economic surplus

what is at marginal benefit and marginal cost curves cross

efficient quantity

distributional consequences

who gets what