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Economics 1021A/B Lecture Notes - Social Cost, Market Failure, Externality

Course Code
ECON 1021A/B
Jeannie Gillmore

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Chapter 5 Efficiency and Equity
Resource Allocation Methods
1. Market Price
When allocates a scarce resource people who willing/able to pay
that price get resource
2 kinds of people decide not to pay those who cannot afford, can
afford but chooses not to pay
2. Command
allocates resources by order of someone in authority
Canada used in firms and government firms
3. Majority Rule
Allocates resources in way that majority of voters choose
Eg. Election for gov representatives
Works well when decision affect large # of people
4. Contest
Allocates resources to a winner (or group of winners)
Sporting events use this method
Contests do good job when efforts of players are hard to monitor and
reward directly
5. First-Come, First-Serve
Allocates resources to those first in line
Eg. Many casual restaurants won’t accept reservations, highway space
Works best when scare resource can serve just one user at a time in
6. Lottery
Allocate resources to those who pick the winning number, draws
lucky cards or comes up on some other gaming system
Eg. Provincial lotteries, casinos, allocate landing slots to airlines in
some airports etc
Works best when no effective way to distinguish among potential user
of a scare resource
7. Personal Characteristics
Allocated based on people with “right” characteristics
Eg. Choose marriage partner based on personal characteristics
Or best jobs to white, anglo saxson males
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8. Force
Plays crucial role for both good and ill
Ill war, theft
Legal system people can live daily lives with assurance that
property is protected
Benefit, Cost, and Surplus
Resources allocated efficiently and in social interest when used in way
people value most highly
1. Demand, Willingness to Pay and Value
Getting value for money --< distinguishing between value and price
Value what we get, price what we pay
Marginal benefit value one more unit of good/service
measured by max price willingly paid for another unit
demand curve = marginal benefit curve
2. Individual Demand and Market Demand
Indiv demand Relationship b.w price of good and quan demanded
by one person
Market demand Relationship b.w price of good and quan
demanded by all buyers
Marginal benefit to entire society marginal social benefit = market
demand curve
3. Consumer Surplus
when people buy something for less than its worth to them
Consumer surplus excess of benefit received from a good over the
amount paid for it
Consumer surplus = marginal benefit(value) of a good price
summed over quan bought
Supply and Marginal Cost
To make profit must sell output for price that exceeds cost of
1. Supply, Cost, and Minimum Supply-Price
Cost what firm gives up during production
Price what firm receives when selling good/service
Marginal cost cost of producing one more unit, min price that
produces must receive to induce them to offer one more
Supply curve = marginal cost curve
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