ECON 1101 1st Edition Lecture 10 Outline of Last Lecture I Surplus II Pareto Efficiency III Link between Pareto Efficiency and Market Allocation Outline of Current Lecture II First Welfare Theorem III Adam Smith Theorem IV Taxes Current Lecture Follow up from last lecture General Principal 3 In any efficient allocation the value reservation price of the last unit should be equal to the cost of the last unit produced Lecture example Only sell 5 widgets otherwise the surplus would be negative 1 First Welfare Theorem a Unregulated market laissez faire allocation is Pareto efficient It maximizes the size of the social pie b ASSUME i Market structure is perfectly competitive ii No externalities my action hurts or benefits others but I don t take into account 1 Example fart or perfume 2 Adam Smith Theorem a Invisible hand no matter what the market creates the biggest surplus possible b FIRST WELFARE ADAM SMITH INVISIBLE HAND Market delivers efficiency It is not necessarily based on equity 1 Taxes a Distort decision making in Econland These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute b With taxes we won t get socially efficient quantity but remember no extremalities c Lets say government gets revenue and might do something useful with it from our profit d It doesn t matter whether the buyer or the seller gets hit with tax e Tax on the seller raises the supply curve f TAX WEDGE price consumer pays and price producers receives also represented by a curve shift but a wedge is cooler according to Kelvin g P d tax P s consumer paid tax producer price
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