ECON-1006EL Chapter Notes - Chapter 12: Productive Efficiency, Competition Law, Allocative Efficiency
23 May 2018
School
Department
Course
Professor
Chapter 12: Economic Efficiency and Public Policy
Definitions
Productive efficiency
for the firm
When the firm chooses among all available production methods to produce a
given level of output at the lowest possible cost
Productive efficiency
for the industry
When the industry is producing a given level of output at the lowest possible
cost. This requires that marginal cost be equated across all firms in the
industry.
Allocative Efficiency
A situation in which the output of each good is such that its market price and
marginal cost are equal.
Producer Surplus
The price of a good minus the marginal cost of producing it, summer over
the quantity produced
Natural Monopoly
AN industry characterized by economies of scale sufficiently large that one
firm can most efficiently supply the entire market demand.
Crown Corporations
In Canada, business concerns owned by the federal or provincial government
Competition policy
Policy designed to prohibit the acquisition and exercise of monopoly power
by business firms
Key Points
• Productive efficiency for the firm requires the firm to be producing its output at the
lowest possible cost.
• Productive efficiency for the industry requires that the marginal cost of production be the
same for each firm.
• If firms and industries are productively efficient, the economy will be on, rather than
inside, the production possibilities curve.
• The economy is allocatively efficient when, for each good produced, its marginal cost of
production is equal to its price.
• Perfectly competitive industries are productively efficient. If an economy were made up
entirely of perfectly competitive industries, the economy would be made allocatively
efficient.
• Monopoly is not allocatively efficient because the monopolist’s price always exceeds its
marginal cost.
• For each unit sold, producer surplus is the difference between price and marginal cost.
• Allocative efficiency occurs at the level of output where the sum of consumer and
producer surplus is maximized.
• The sum of producer and consumer surplus is maximized only at the perfectly
competitive level of output. This is the only level of output that is allocatively efficient.
• One of the most important issues in public policy is whether, and under what
circumstances, government action can increase the allocative efficiency of market
outcomes.
• When a natural monopoly with falling average costs sets price equal to marginal cost, it
will suffer losses.
• For a natural monopoly with falling average costs, a policy of average-cost pricing will
not result in allocative efficiency because price will not equal marginal cost.
• Average-cost pricing generally leads to inefficient long-run investment decisions
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Document Summary
When the firm chooses among all available production methods to produce a given level of output at the lowest possible cost. When the industry is producing a given level of output at the lowest possible cost. This requires that marginal cost be equated across all firms in the industry. A situation in which the output of each good is such that its market price and marginal cost are equal. The price of a good minus the marginal cost of producing it, summer over the quantity produced. An industry characterized by economies of scale sufficiently large that one firm can most efficiently supply the entire market demand. In canada, business concerns owned by the federal or provincial government.
