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Lecture 7

Lecture Seven: Effiiency and Equity
Lecture Seven: Effiiency and Equity

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York University
ECON 1000
George Georgopoulos

Lecture Seven: Efficiency and Equity October 20, 2011 Resource Allocation Methods Scarce resources might be allocated by - Market price: let the market regulate itself - Command: regulated by the government (communism) - Majority rule: have a vote - Contest: the winner of a contest gets first choice - First come, first served: getting what is available - Sharing equally: divide up the resources equally - Lottery: random draw - Personal characteristics: certain groups of people get certain resources - Force: “might is right” Market Price When a market allocates a scare resource, the people who get the resource are those who are willing to pay the market price. Most of the scare resources that you supply get allocated by the market price - How much you produce and how much you work depends on how much money you make for it You sell your labour services in a market, and you buy most of what you consume in markets. - How much work you do and how much you buy depends on how much you make For most goods, the market does a fairly good job of this. Disadvantages of this System People with all the resources and wealth therefore determine what gets produced, even though that might not necessarily benefit the majority of the population. Command System Definition - the command system allocates resources by the order (command) of someone in authority. Example - If you have a job, most likely someone tells you what to do. Your labour time is allocated to specific tasks by command. A command system works well in organizations with clear lines of authority but badly in an entire economy. - The Soviets attempted to use this but it was unsuccessful Disadvantages of this System Same as above. People in power may have certain interests and use the resources to support their interests as opposed to trying to benefit the entire society (corruption) - Soviet Russia often had problems feeding the people of their country, however they were very advanced in military tactics because the government thought that was more important so that was where resources were allocated. Majority Rule Definition - majority rue allocates resources in the way the majority of voters choose. Societies use majority rule for some of their biggest decisions. - Government, taxes, public defense ect For example - Tax rates that allocate resources between private and public use and tax dollars between competing uses such as defense and health care. Majority rule works well when the decision affects a lot of people because it takes into consideration the interests of those who are affected by the choice. Contest A contest allocates resources to a winner or a group of winners. The most obvious contests are sporting events but they occur in other arenas, such as the Oscars for films. Contest works well when the efforts of the other “players” are hard to monitor and reward directly. - Looking at the final product in the competition instead of judging other factors First Come, First Served A first come, first serve allocates resources to those who are first in line. Casual restaurants are an example of how this system works efficiently in everyday life. However, this does not really work for most parts of the economy (could lead to corruption, uneven distribution of resources ect) First come first served works best when scares resources can serve just one person at a time. Sharing Equally When a resource is shared equally, everyone gets the same amount of it. - you might use this method to share a dessert in a restaurant To make sharing equally work, people must be in agreement about its use and implementation. - It works best for small groups who share common goals. Problems with this System Some people put more effort into their work, and th
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