6. ECONOMIC EFFICIENCY

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Department
Economics
Course
ECO101H1
Professor
Gustavo Indart
Semester
Summer

Description
ECONOMIC EFFICIENCY Productive efficiency: For the firm: requires that the firm be producing its output at the lowest possible cost For the industry: requires that all firms in the industry have the same marginal cost Allocative efficiency: In an individual industry: when the level of output is such that the marginal cost of production equals the market price. In the overall economy: when price equals cost in all industries at once. Consumer and Producer Surplus Consumer surplus: difference between the value that consumers place on a product and the payment they actually make to buy that product (area under the demand curve and above the market price line) Producer surplus: difference between price and marginal cost (area above supply curve and below the market price line) Incidence (or Burden) of a Per Unit Tax Buyers’ Share: difference between the pre-tax and post-tax price paid by Buyers Buyers’ Share (BS) = P - 1 0 Sellers’ Share: difference between the pre-tax and post-tax price received by Sellers Sellers’ Share (SS) = P -0(P -1Tax) The tax revenue collected by the government (or total tax paid) is graphically the area with the tax as the vertical dimension [P -1(P -1Tax)], which is the difference between the pre-tax and the post-tax Supply curves at Q1. The burden of a tax is distributed between consumers and sellers in a manner that depends on the relative elasticities of supply and demand When demand is inelastic relative to supply, consumers bear most of the burden of taxes When supply is in
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