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Chapter 5

Chapter 5 Lecture Notes.doc

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School
University of Waterloo
Department
Economics
Course
ECON 101
Professor
Corey Van De Waal
Semester
Winter

Description
CHAPTER 5: EFFICIENCY AND EQUITY Scarce resources might be allocated by  Market price  Whoever is willing to pay the price will attain the good or service  Command  Example: manager giving direction for employees  Majority rule  Democratic voting  Contest  Prize, best wins  First-come, first-served  Example: restaurant seating basis  Sharing equally  Equally divide resources  Lottery  One individual wins all resources  Personal characteristics  Associated with discrimination (white people get jobs over colored)  Force  War will reallocate oil How does each method work? When a market allocates a scarce resource, the people who get the resource are those who are willing to pay the market price. Most of the scarce resources that you supply get allocated by market price. You sell your labour services in a market, and you buy most of what you consume in markets. For most goods and services, the market turns out to do a good job. 1 Command  Command system allocates resources by the order (command) of someone in authority.  For example, if you have a job, most likely someone tells you what to do.  Your labour time is allocated to specific tasks by command.  A command system works well in organizations with clear lines of authority but badly in an entire economy. Majority Rule  Majority rule allocates resources in the way the majority of voters choose.  Societies use majority rule for some of their biggest decisions.  For example, tax rates that allocate resources between private and public use and tax dollars between competing uses such as defense and health care.  Majority rule works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently. Contest  A contest allocates resources to a winner (or group of winners).  The most obvious contests are sporting events but they occur in other arenas:  For example, The Oscars are a type of contest.  Contest works well when the efforts of the “players” are hard to monitor and reward directly. First-Come, First-Served  A first-come, first-served allocates resources to those who are first in line. 2  Casual restaurants use first-come, first served to allocate tables. Supermarkets also uses first-come, first-served at checkout.  First-come, first-served works best when scarce resources can serves just one person at a time in a sequence. Sharing Equally  When a resource is shared equally, everyone gets the same amount of it.  You might use this method to share a dessert in a restaurant.  To make sharing equally work, people must be in agreement about its use and implementation.  It works best for small groups who share common goals and ideals. Lottery  Lotteries allocate resources to those with the winning number, draw the lucky cards, or come up lucky on some other gaming system.  Provincial lotteries and casinos reallocate millions of dollars worth of goods and services each year.  But lotteries are more widespread. For example, they are used to allocate landing slots at some airports.  Lotteries work well when there is no effective way to distinguish among potential users of a scarce resource Personal Characteristics  Personal characteristics allocate resources to those with the “right” characteristics.  For example, people choose marriage partners on the basis of personal characteristics.  But this method gets used in unacceptable ways: allocating the best jobs to white males and discriminating against women. Force  Force plays a role in allocating resources. 3  For example, war has played an enormous role historically in allocating resources.  Theft, taking property of others without their consent, also plays a large role.  But force provides an effective way of allocating resources—for the state to transfer wealth from the rich to the poor and establish the legal framework in which voluntary exchange can take place in markets. Demand, Willingness to Pay, and Value  Value is what we get, price is what we pay.  The value of one more unit of a good or service is its marginal benefit.  We measure value as the maximum price t
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