Chapter 12. Economic Efficiency and Public Policy

Chapter Overview

  • Economic Efficiency and Public Policy from the Economics Fourteenth Canadian Edition covers fundamental concepts of economic efficiency, regulation, and competition policy in Canada.

12.1 Productive and Allocative Efficiency

  • Learning Objectives: Distinguish between productive and allocative efficiency; understand why perfect competition achieves allocative efficiency while monopoly does not.

Productive Efficiency

  • Full employment of resources does not ensure efficiency. Key criteria include:

    • Cost minimization for any output level.

    • Equal marginal costs across firms within an industry.

    • Avoidance of overproduction of one product and underproduction of another.

Allocative Efficiency

  • Achieved when price equals marginal cost (p = MC) for all products. It's crucial for assessing market performance.

Efficiency in Market Structures

  • Competitive firms are productively and allocatively efficient. In contrast, single-price monopolists are productively efficient, but allocatively inefficient due to p > MC, causing deadweight loss.

12.2 Economic Regulation to Promote Efficiency

Regulation of Natural Monopolies

  • Natural Monopoly occurs when the long-run average cost curve declines over the market demand range, permitting only one firm to achieve minimum efficient scale (MES).

  • Regulatory responses include:

    1. Public ownership

    2. Regulation of prices

Pricing Policies

  • Marginal-Cost Pricing: Allocatively efficient; however, firms incur losses.

  • Average-Cost Pricing: Zero profit condition but allocatively inefficient (p > MC).

  • Comparison: Marginal-cost pricing leads to efficiency but requires government support to sustain losses; average-cost pricing could distort long-term investment decisions.

12.3 Canadian Competition Policy

Evolution and Reform

  • Competition Laws: Designed to prevent anti-competitive behaviors (price fixing, harmful mergers, unfair trade practices).

  • Reforms (2009): Emphasis on consumer protection by enhancing advertising honesty, improving cartel investigations, preventing monopoly abuse, and reviewing mergers.'

Challenges Ahead

  • Globalization demands a focus on international market definitions and may necessitate standardized global competition policies to address mobile firms with significant market power.