EC238 Chapter Notes - Chapter 4: Environmental Quality, Pareto Efficiency, Economic Efficiency
Document Summary
The central idea of economic efficiency is that there should be a balance between the marginal benefits and marginal costs of production. When we refer to marginal costs we must include all the costs of producing the particular item in question, no matter to whom them accrue and whether or not these costs have a market-determined price. Social efficiency requires that all market and non-market values be incorporated into the marginal benefits and marginal costs of production. If this is the case, social efficiency is obtained when marginal benefits equal marginal costs of production. Equating marginal willingness to pay and the aggregate marginal cost curve yields the socially efficient equilibrium. When a rate of output is at the socially efficient level, the net social value, defined at total willingness to pay minus total costs, is as large as possible. It is also called net social value, or net benefits, or the social surplus.