ECON 208 Chapter 12: ch.12

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Chapter 12 - Economic Efficiency and Public Policy
Productive Efficiency (firm) when the firm chooses among all
available production methods to produce a given level of
output at the lowest possible cost
Productive Efficiency (industry) when the industry is
producing a level of output at the lowest possible cost
Allocative Efficiency situation in which the market price for
each good is equal to its marginal cost
Producer Surplus price of a good minus the MC of producing
it over quantity P-MC/Q
Natural Monopoly an industry characterized by economies of
scale sufficiently large that one firm can most efficiently supply
the entire market demand
Marginal-Cost Pricing setting price equal to MC so that
buyers for the last unit are just willing to pay the amount that it
costs to make the unit
Two-Part Tariff method of charging for a good/service in which
the consumer pays a flat access fee and a specified amount
per unit purchased
Competition Policy policy designed to prohibit the acquisition
and exercise of monopoly power by business firms
Combine Laws laws designed to prevent anticompetitive
Full employment of resources does not guarantee efficiency:
1. Firms may not use least-cost methods of production
2. Marginal costs may not be equated across firms in an
3.Too much of
one product and
too little of
another may be
Productive Efficiency (industry)
Profit-maximizing, competitive firms are productively efficient.
If they interact in competitive market, outcome will be
allocatively efficient: p=MC
Single-price monopolist is productively efficient but allocatively
inefficient: p>MC
Allocative Efficiency and PPB
-Consider MC and MV in all
separate markets to know
which point is allocatively
- Produce when MC = MV
- On the PPB when all
resources are being use to
their full capacity =
productively efficient way
Consumer surplus - under DC
and above P
Producer surplus - above SC
and below P
Allocative efficiency is achieved
when total surplus is maximized
-occurs in perfectly competitive
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