Transcript Document

Economics: Principles and
Applications, 2e
by Robert E. Hall &
Marc Lieberman
© 2001 South-Western, a division of Thomson Learning
Chapter 14:
Economic Efficiency and the
Competitive Ideal
© 2001 South-Western, a division of Thomson Learning
The Meaning of Efficiency
Economic efficiency is achieved when there is
no way to rearrange the production or
allocation of goods in a way that makes one
person better off without making anybody
else worse off.
© 2001 South-Western, a division of Thomson Learning
The Meaning of Efficiency
An efficient economy is not necessarily
a fair economy.
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Pareto Improvements
Pareto Improvement
An action that makes at least one person
better off and harms no one.
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Pareto Improvements
Economic Efficiency
A situation in which every Pareto
improvement has occurred.
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Pareto Improvements
•Side Payments and Pareto Improvements
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Pareto Improvements
Some actions that--by themselves--would not
be Pareto improvements can be converted
into Pareto improvements if accompanied by
an appropriate side payment.
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The Elements of Efficiency
•Productive Efficiency
•Allocative Efficiency
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The Elements of Efficiency
Productive Efficiency
When it is impossible to produce more of one
good without producing less of some other
good.
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The Elements of Efficiency
Three Requirements for Productive Efficiency
•The economy must use all of its available resources.
•Each firm must produce the maximum amount possible
from the resources available to it.
•The allocation of inputs among firms must produce the
maximum possible amount of output.
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The Elements of Efficiency
Perfectly competitive markets tend to be
productively efficient.
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The Elements of Efficiency
Productive efficiency is necessary for
economic efficiency.
© 2001 South-Western, a division of Thomson Learning
The Elements of Efficiency
Allocative Efficiency
When there is no change in quantity
consumed of any good by an consumer that
would be a Pareto improvement.
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The Elements of Efficiency
The efficient level of production of any good is
where the demand, or marginal benefit, curve
crosses the supply, or marginal cost, curve. At any
other level of output, a Pareto improvement is
possible by changing production.
© 2001 South-Western, a division of Thomson Learning
Economic Efficiency &
Perfect Competition: A
Summary
Perfectly competitive markets tend to be
economically efficient--that is, both
productively and allocatively efficient.
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The Inefficiency of
Imperfect Competition
In an imperfectly competitive market, the
equilibrium price exceeds the firm’s marginal
cost of production.
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The Inefficiency of
Imperfect Competition
Monopoly and imperfectly competitive
markets, in which firms charge a price greater
than marginal cost, produce too little output
at too high a price.
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The Inefficiency of
Imperfect Competition
In imperfect competition, it is the inability of
firms to make separate side deals through
price discrimination that prevents Pareto
improvements from being carried out.
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Where Do We Go
from Here?
•What are ways that markets can fail to
perform?
•What can we do when an economy will not
achieve economic efficiency?
© 2001 South-Western, a division of Thomson Learning