Economic Efficiency and the Role of Government
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Transcript of Economic Efficiency and the Role of Government
ECONOMICS: Principles and Applications 3eHALL & LIEBERMAN© 2005 Thomson Business and Professional Publishing
Economic Efficiencyand the Role of Government
Figure 1 The Marginal Benefit from Guitar Lessons
1 2 3 4 5
$25$23$21$19$17
Demand
Flo
Flo (again)Joe
BoZoe
Price
Number of Lessons per Week
While the first lesson is worth $25 to some consumer (Flo) . . .
and the third is worth $21.
the second lesson is worth only $23 . . .
Figure 2 The Marginal Cost of Guitar Lessons
The smallest cost for this first lesson is $13 . . .
and $17 for the third.
but it's $15 for the second . . .
1 2 3 4 5
$21$19$17$15$13
McCollum
Supply
Martin (again)Gibson
Martin (again)Martin
Price
Number of Lessons per Week
Figure 3 Efficiency in the Market for Guitar Lessons
$25$23$21$19$17$15$13 Demand
1. Joe would pay as much as $23 for the second lesson . . .
Flo
FloJoe
McCollumMartin
Zoe
Supply
2. while Martin would offer it for as little as $15.
1 5
Martin
GibsonMartin
3. Four lessons is the equilibrium and the efficient quantity.
Price
Number of Lessons per Week2 3 4
Bo
Figure 4 Consumer Surplus in a Small and a Large Market for Guitar Lessons
1 2 3 4 5
$25$23$21$19$17
Demand
The total shaded area is market consumer surplus.
(a)
Price
Number of Lessons per Week
1. When market price is $19, someone (Flo) gets $6 in consumer surplus on the first lesson . . .
3. and someone (Flo again) gets $2 in consumer surplus on the third.
2. someone (Joe) gets $4 in consumer surplus on the second . . .
Assumed Market Price
Figure 4 Consumer Surplus in a Small and a Large Market for Guitar Lessons
4,000
$19Market Price
(b)
Price
Number of Lessons per Week
In a market with many buyers, market consumer surplus is the entire area under the demand curve and above the market price.
Demand
Figure 5 Producer Surplus from Selling Guitar Lessons
1 2 3 4
$21$19$17$15$13
Supply
(a)
Price
Number of Lessons per Week
The total shaded area is market producer surplus.
3. and someone (Gibson) gets $2 on the third.
1.When market price is $19, someone (Martin) gets $6 in producer surplus on the first lesson . . .
2. someone (Martin again) gets $4 in producer surplus on the second . . .
Assumed Market Price
5
Figure 5 Producer Surplus from Selling Guitar Lessons
4,000
$19
In a market with many sellers, market producer surplus is the entire area above the market supply curve and below the market price.
Price(b)
Number of Lessons per Week
Supply
Market Price
Figure 6 Total Net Benefits in a Competitive Market for Guitar Lessons
$19
4,000
S
D
Equilibrium Price
Price
Equilibrium Quantity
Figure 7 Why Price Ceilings and Price Floors Are Inefficient
$19
4,000
S
$15
6,0002,000
D
Price
1. A price ceiling of $15 . . .
3. It also decreases market quantity, taking away some consumer surplus
A
B D
EC
2. transfers surplus from producers to consumers.
4 . . . . and some producer surplus, which are not transferred to anyone.
$23
(a)
Figure 7 Why Price Ceilings and Price Floors Are Inefficient
3. It also decreases market quantity, taking away some consumer surplus
$19
4,000
S
$21
3,000
D
Price
1. A price floor of $21 . . .
A
BDE
C
2. transfers surplus from consumers to producers.
$17
5,000
4 . . . . and some producer surplus, which are not transferred to anyone.
Figure 8 Government Infrastructure and Output per Worker
LowQuality of Infrastructure
Medium High
Ave
rage
Out
put p
er W
orke
r
2,000
6,000
10,000
14,000
$18,000
Figure 9 The Welfare Loss from Monopoly1. A monopoly charges a higher price
than a competitive market . . .3. The result is a welfare loss . . .
4. from not producing the efficient quantity, at point E.
Number of Lessons per Week
Dollars
E
2,500
$22$19
4,000
DMR
MC
2. and produces a lower quantity.
Figure 10 Regulating a Natural Monopoly
B$15
$29
A
C
MC
$60
LRATC
50,000
DMR
85,000100,000 Number of
Households Served
Dollars
Unregulated monopoly
"Fair rate of return" production
F
Efficient production (requires subsidy)
Figure 11A Tax on Producers to Correct a Negative Externality
100 125
D
S
$1.00A
MSCC $0.50
B
(a)
Millions of Gallons per Period
Dollars
2. The efficient quantity is here . . .
3. but the equilibrium quantity is here.
4. In equilibrium, the welfare loss is triangle ABC.
1. This market has a negative externality of $0.50 per unit.
Figure 11A Tax on Producers to Correct a Negative Externality
100 125
D
$1.00
$0.50B
(b)
Millions of Gallons per Period
Dollars
$1.30
$0.80
SBefore Tax
SAfter Tax
6. shifts the supply curve upward . . .
7. and moves the equilibrium to the efficient quantity.
5. A tax per unit on producers, equal to the negative externality per unit,
A
(b)
Figure 12 A Subsidy for Consumers to Correct a Positive Externality
800,000 1,000,000
D
S
$100,000MSBC
A
$30,000
2. The equilibrium quantity is here . . .
3. but the efficient quantity is here.
4. In equilibrium, the welfare loss is triangle ABC.
(a)
Number of Degrees per Year
Dollars
1.This market has a positive externality of $30,000 per college degree.
B
Figure 12 A Subsidy for Consumers to Correct a Positive Externality
S
800,000 1,000,000
$100,000
B
A
$30,000
Number of Degrees per Year
Dollars
(b)
$114,000
$84,000DBefore Subsidy
DAfter Subsidy
6. shifts the demand curve upward . . .
5. A subsidy per unit for consumers equal to the positive externality per unit . . .
7. and moves the market to the efficient quantity
Figure 13 Pure Private, Pure Public, and Mixed Goods
More Nonexcludable
More Excludable
More Rival More Nonrival
Mixed Good
Pure Private Good Mixed Good
Pure Public Good
• food, clothing, housing
• sold-out movie• crowded
highway• newspaper
• software
• movie with empty seats
• uncrowded highway
• downloaded music file
• cable television
• urban park
• national defense, legal system
• police and fire protection• crowded
city streets• fish in international
waters