1Econ 101 M. SalemiEcon 101 M. SalemiEconomic Efficiency ExamplesEconomic Efficiency ExamplesRecitation AssignmentRecitation AssignmentNewsNewsReviewReviewA Tax Levied on A Good Or Service A Tax Levied on A Good Or Service Creates Economic InefficiencyCreates Economic InefficiencyWho Bears the Burden of a Tax?Who Bears the Burden of a Tax?What Have We LearnedWhat Have We LearnedEcon 101 M. SalemiEcon 101 M. SalemiRecitation AssignmentRecitation AssignmentDownload and read Download and read ““The Economic The Economic Organization of a P.O.W. CampOrganization of a P.O.W. Camp””Download the discussion questions and Download the discussion questions and arrive at your preliminary answers.arrive at your preliminary answers.Bring the reading and the questions to Bring the reading and the questions to recitation with you.recitation with you.There will be a quiz to determine if you There will be a quiz to determine if you are prepared for discussion. are prepared for discussion. Econ 101 M. SalemiEcon 101 M. SalemiNew York TimesNew York TimesJuly 25, 2005July 25, 2005To Reduce the Cost of Teenage Temptation, Why Not Just Raise theTo Reduce the Cost of Teenage Temptation, Why Not Just Raise thePrice of Sin? Price of Sin? By DAVID LEONHARDTBy DAVID LEONHARDTWHEN you look back on all the attempts to curb teenage drinking,WHEN you look back on all the attempts to curb teenage drinking,smoking and drug use over the last couple of decades, you start smoking and drug use over the last couple of decades, you start to ask to ask yourself a question that countless parents have asked: Does anybyourself a question that countless parents have asked: Does anybody ody really know how to change a teenager's behavior?really know how to change a teenager's behavior?Much of this back and forth is unnecessary. There is in fact a sMuch of this back and forth is unnecessary. There is in fact a surefire urefire way to get teenagers to consume less beer, tobacco and drugs, way to get teenagers to consume less beer, tobacco and drugs, according to one study after another: raise the cost, in terms oaccording to one study after another: raise the cost, in terms of either f either dollars or potential punishment. dollars or potential punishment. Teenagers, it turns out, are highly rational creatures in some wTeenagers, it turns out, are highly rational creatures in some ways. ays. BudweisersBudweisersand Marlboros are discretionary items, and their customers and Marlboros are discretionary items, and their customers treat them as such. Gasoline consumption, by contrast, changes otreat them as such. Gasoline consumption, by contrast, changes only nly marginally when the price of a gallon does.marginally when the price of a gallon does.Econ 101 M. SalemiEcon 101 M. SalemiWhat Economists Mean by EfficiencyWhat Economists Mean by EfficiencyAn allocation is An allocation is efficientefficientif it is not possible if it is not possible to reallocate goods in a way that makes to reallocate goods in a way that makes someone better off without making someone better off without making someone else worse off.someone else worse off.If it is possible to make someone better off If it is possible to make someone better off without making anyone else worse off an without making anyone else worse off an allocation is allocation is inefficientinefficient..2Econ 101 M. SalemiEcon 101 M. SalemiEconomic EfficiencyEconomic EfficiencyThe Market Allocation Achieved by the The Market Allocation Achieved by the Equilibrium Price Is Efficient.Equilibrium Price Is Efficient.Markets are efficient when the value placed Markets are efficient when the value placed by buyers on the last unit of the good by buyers on the last unit of the good bought bought just equalsjust equalsthe marginal cost of the marginal cost of producing that good.producing that good.Econ 101 M. SalemiEcon 101 M. SalemiUse Your Clickers to Answer The Use Your Clickers to Answer The Following Following Graded Question.Graded Question.In Asheville, there are two sources In Asheville, there are two sources of electric power. of electric power. 1.1.A hydroelectric plant produces A hydroelectric plant produces power at a cost of $0.04 per power at a cost of $0.04 per KWH. KWH. 2.2.A coal fired generator produces A coal fired generator produces power at a cost of $0.07 per power at a cost of $0.07 per KWH. KWH. What should Asheville citizens pay What should Asheville citizens pay for electricity?for electricity?Econ 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiThe electricity price paid by Ashville The electricity price paid by Ashville customers shouldcustomers should……A.A.Equal the average of the costs at the two Equal the average of the costs at the two production facilities.production facilities.B.B.Equal the lower, hydroelectric price Equal the lower, hydroelectric price provided the hydroelectric plant can provided the hydroelectric plant can meet total customer demand.meet total customer demand.C.C.Equal the higher coalEqual the higher coal--fired plant price no fired plant price no matter how large customer demand.matter how large customer demand.D.D.Equal the marginal cost of electricity at Equal the marginal cost of electricity at the plant that supplies them. the plant that supplies them.3Econ 101 M. SalemiEcon 101 M. SalemiThe electricity price paid by Ashville The electricity price paid by Ashville customers should equal the lower price if customers should equal the lower price if the hydro plant can meet total demand.the hydro plant can meet total demand.If the hydro plant can meet total demand, If the hydro plant can meet total demand, then the marginal cost of electricity to then the marginal cost of electricity to Ashville is the hydro price.Ashville is the hydro price.It is generally not efficient to have different It is generally not efficient to have different customers pay different prices.customers pay different prices.Econ 101 M. SalemiEcon 101 M. SalemiLevying a Tax on A Good Or Service Levying a Tax on A Good Or Service Sometimes Sometimes Creates an Inefficient AllocationCreates an Inefficient AllocationA tax on a good creates an inefficiency A tax on a good creates an inefficiency because it usually causes the market price because it usually causes the market price of the good to be different from the of the good to be different from the marginal cost of the good.marginal cost of the good.A tax on a good leads