EC238 Chapter Notes - Chapter 4: Environmental Quality, Pareto Efficiency, Economic Efficiency

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plumbeaver231

3 Oct 2013

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The central idea of economic efficiency is that there should be a balance between the marginal benefits and marginal costs of production. When we refer to marginal costs we must include all the costs of producing the particular item in question, no matter to whom them accrue and whether or not these costs have a market-determined price. Social efficiency requires that all market and non-market values be incorporated into the marginal benefits and marginal costs of production. If this is the case, social efficiency is obtained when marginal benefits equal marginal costs of production. Equating marginal willingness to pay and the aggregate marginal cost curve yields the socially efficient equilibrium. When a rate of output is at the socially efficient level, the net social value, defined at total willingness to pay minus total costs, is as large as possible. It is also called net social value, or net benefits, or the social surplus.

Related Questions

In a monopolistically competitive market, the rule for maximizing profit is to set MR=MC, which means

Price is higher than marginal revenue

Price is equal to marginal cost

Price is equal to marginal revenue

Price is lower than marginal revenue

Perfect competition displays________________________ because the social benefits of additional production, as measured by the price that people are willing to pay, are in balance with the _____________________to society of that production

Economic efficiency; marginal revenues

Allocative efficiency; marginal costs

Economic efficiency; total revenues

Allocative efficiency; total costs

How can parties who find themselves in a prisoners dilemma situation avoid the undesired outcome and cooperate with each other

Find effective ways to penalize firms who do not cooperate

Sign legally enforceable contracts setting out their mutual agreement to act like a monopoly

One oligopoly can physically beat up another oligopoly

By seeking alternatives to create pressure for members to keep output up and prices up

In the framework of an oligopoly, what strategy can work like a silent form of cooperation

Always match other cartel firmsï¿½ price cuts, but donï¿½t match price increases

Immediately match price increase

Legally enforcement agreements

fuchsialocust206

Which of the following would cause the market supply curve of a good or service to shift?

Select one:

a. A change in the quantity demanded of the product

b. A change in the cost of labor to make the product

c. A change in the number of consumers

d. a change in the selling price of the product

Question 2

Question text

Which of the following generally decreases the supply of a product?

Select one:

a. The cost of making the product decreases

b. The selling price of the product increases.

c. More and more producers of the product enter the market

d. The tax on the product increases

Question 3

Question text

When considering the stages of production, which of the following is true?

Select one:

a. When marginal product becomes negative, the workers are getting in each othersâ way.

b. in producing a good, it is always a good idea to have at least 4 or 5 people at every level of production.

c. The more workers that are hired, the more efficient the production

d. The principle of diminishing returns explains that the fewer workers in a factory, the more likely the company is to be successful

Question 4

Question text

Total cost is the sum of

Select one:

a. fixed and variable costs

b. Marginal costs and marginal product

c. Fixed costs and marginal product

d. Marginal costs and income tax costs

Question 5

Question text

A company is maximizing profit when marginal revenue

Select one:

a. Equal to marginal cost

b. Is two times the marginal cost

c. Is one â half of marginal cost

d. Less than marginal cost

2.) Consider a beekeeper that is deciding how much honey to produce. The beekeeper gains a benefit from producing honey, represented by the marginal benefit function and which is given by:

MB= 300 - 6Q

where Q is barrels of honey.

In addition, she has a marginal cost function, which reflects her cost of producing honey; this is given by:

MC= 40 + 4Q

The beekeeperâs total profit function is given by:

Profit= 360Q + Q^2

The more honey the beekeeper produces, the more bees there are to pollinate a neighboring apple orchard. Thus, in addition to the private benefit accruing to the beekeeper herself, there is also a marginal external benefit to the apple orchard, which is given by:

MEB= 100 - 2Q

And a total external benefit to the apple orchard given by:

TEB= 100Q - Q^2

a. Find an expression for the social marginal benefit (SMB) in this case, defined as you think appropriate. Calculate the level of honey production that will arise if the beekeeper acts in her self-interest only. Calculate the socially efficient level of honey production as well.

b. Suppose that the beekeeper and the owner of the apple orchard enter into negotiations. The orchard owner wants to offer a payment to the beekeeper to change honey production from her self-interested production level to the socially efficient level (all at once). What is the maximum total payment that the orchard owner would be willing to pay for this overall change? What is the minimum total payment that the beekeeper would require before making this overall change?

c. Assume that, if a deal is reached, each party must pay $35 in legal fees to finalize it. If there are no additional transaction costs, will the socially efficient quantity be reached? Explain.

d. Irrespective of your answer to part c, assume that the beekeeper and the orchard owner come to a private agreement to set honey production at the socially efficient quantity. However, now suppose that a policymaker reads somewhere that honey production provides a positive externality to apple orchards, and therefore decides that the beekeeper should be provided with a production subsidy for each unit of honey that the beekeeper is willing to produce. With this subsidy in place, the beekeeper decides to increase production by an additional 5 barrels. Calculate the associated efficiency loss.

e. If honey is good to eat and bees are good for trees, why is there such a thing as too much honey?

silvercrow642

EC238 Chapter Notes - Chapter 4: Environmental Quality, Pareto Efficiency, Economic Efficiency

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