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Chapter 12.docx

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Economics (Arts)
ECON 208
Sebastien Forte

Chapter 12: Economic Efficiency and Public Policy  Full employment of resources does not guarantee efficiency: 1. Firms may not use least-cost methods of production; 2. Marginal costs may not be equated across firms in an industry 3. Too much of one product and too little of another product may be produced  Productive efficiency for a firm requires costs to be minimized for any given level of output  Productive efficiency for an industry requires the MC to be the same for every firm  If all industries are productively efficient, then the economy is on the production possibilities boundary  The economy is allocatively efficient when p=MC for every product. In order to know which point allocatively efficient, we need t think about marginal cost and marginal value in all of the separate markets  What is the “right” amount to produce?  As you move along the PPB you are shifting the supply and demand curve  MC = MV (marginal value): allocative efficiency  Profit-maximizing, competitive firms are productively efficient  If they interact in competitive markets, the outcome will be allocatively efficient (p=MC)  If they aren’t productively efficient, they go bankrupt  On the other hand, monopoly is productively efficient, but allocatively inefficient (since p > MC)  Allocative efficiency is achieved when total surplus is maximized (ie. You can’t be producing at above Q0 because you’ll get more consumer surplus but less producer surplus)  A monopolist generates a deadweight loss by restricting output below the competitive level.  Market failures: When the free market fails to generate Allocative efficiency  Under some circumstances government action can correct the market failure and improve the efficiency of market outcomes  *see table 12-1 (review of four market structures)  Regulation of natural monopolies:  Natural monopoly: a situation where costs decline over the whole range of market output. There is only room for one firm to achieve MES (minimum
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