Ch 5- Economic Efficiency

external benefits (positive)

- present when actions of an individual or group generate benefits for nonparticipating parties -ex: raising neighbor's property value by making your own yard look good

external costs (negative)

- present when the actions of an individual or group that harm property of others w/o consent - this problem arises because property rights are imperfectly defined &/or enforced

lack of competition

- sellers may gain by restricting output and raising price - too few units will be produced

1. all activities that provide individuals with more benefits than costs must be undertaken 2. no activities that provide benefits less than costs should be undertaken

2 conditions necessary for ideal efficiency

- ideal price is larger than market price and ideal quantity is smaller than market quantity

When external costs are present, how will the equilibrium price and output in a competitive market compare with the price and output consistent with ideal economic efficiency? is it too large or too small?

- efficient price is higher than market efficiency and efficient quantity is higher than efficient market

When the production and sale of a product generates external benefits will competitive markets sometimes produce too little of a product?

free rider

a person who receives the benefits of the good without helping to pay for its cost / occurs when too little of a good is produced

market failure

a situation in which a market left on its own fails to allocate resources efficiently

1. lack of competition 2. extrernalities 3. public goods 4. poor info

four reasons invisible hand may fail

government failure

government intervention that fails to improve economic outcomes

- consumer information publications (unbiased and expertise) - brand names and franchises (standardized quality and dependability) - warranties (supplier promises to repair possible problems)

market responses to poor info

- demand curve understates the total value of output - units that are more highly valued than their cost may not be produced - too few units are produced

problems with external benefits

- supply curve understates the true cost of production - units may be produced that are valued less than their true cost - too many units are produced

problems with external cost

marginal benefits

the additional or extra benefit associated with an action

marginal costs

the extra cost of producing one more unit of output

jointly consumed public goods

when individuals can simultaneously enjoy consumption of the same product or service

non-excludable public goods

when it is not possible to restrict consumption of the good to those who pay for it -ex: asteroid protection / radio signals