Efficiency

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10 Terms

1
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Consumer Surplus

the difference between a buyer’s reservation price and the price actually paid

<p>the difference between a buyer’s reservation price and the price actually paid</p>
2
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Producer Surplus

the difference between a seller’s reservation price and the price received

<p>the difference between a seller’s reservation price and the price received</p>
3
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Total Economic Surplus (Total Welfare)

Consumer Surplus + Producer Surplus 

4
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Pareto Efficient

no one can be made better off without making someone worse off

<p><span>no one can be made better off without making someone worse off</span></p>
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Competitive Equilibrium

the benchmark of efficiency

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What will be true when the Market Equilibrium is Pareto Efficient?

  • All benefits from consumption are captured by the demand curve

  • All costs from production are captured by the supply curve 

  • Information

  • Low transaction cost 

  • Perfectly competitive market 

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Price Ceilings

<p></p>
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DWL - Deadweight Loss

the reduction in total economic surplus  (orange area) - price we have to pay for the government policy

<p><span>the reduction in total economic surplus&nbsp; (orange area) - price we have to pay for the government policy</span></p>
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Price Floor

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Efficiency isn’t the only Goal

  • Equity vs efficiency

  • But efficiency should be first goal

  • Economic policy