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Chapter 5

Chapter 5 - Efficiency and Equity.docx

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University of Waterloo
ECON 101
Shi Lei Niu

ECON 101 – Introduction to Microeconomics Chapter 5 – Efficiency and Equity Resource Allocation Methods - The goal is to evaluate ability of markets to allocate resources efficiently and fairly - Resources are scarce, so they must be allocated somehow Resources might be allocated by - Market price - Command - Majority rule - Contest - First-come, first-served - Lottery - Personal characteristics - Force Market Price - When a market price allocates a scarce resource, the people who are willing and able to pay that price to get the resource - Two kinds of people decide not to pay the market price: those who can afford to pay but choose not to buy and those who are too poor and can’t afford to buy Command - A command system allocates resources by the order (command) of someone in authority - A command system works well in organizations in which the lines of authority and responsibility are clear and it is easy to monitor the activities being performed - Works badly when range of activities to be monitored is large and when it is easy for people to fool those in authority Majority Rule - Majority rule allocates resources in the way that a majority of voters choose - Societies use majority rule to elect representative governments that make some of the biggest decisions - Majority rule works well when decisions being made affect large numbers of people and self-interest must be suppressed to use recourses most efficiently Contest - A contest allocates resources to a winner (or a group of winners) - Contests do a good job when the efforts of the players are hard to monitor and reward directly First-Come, First-Served - A first-come, first-served method allocates resources to those who are first in line - First-come, first-served works best when a scarce resource can serve just one user at a time in a sequence - By serving the user who arrives first, this method minimizes the time spent waiting for the resource to become free Lottery - Lotteries allocate resources to those who pick the winning number, draw lucky cards, or come up lucky on some other gaming system - Work best when there is no effective way to distinguish am
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