ECON 1101 1st Edition Lecture 10 Outline of Last Lecture I. SurplusII. Pareto EfficiencyIII. Link between Pareto Efficiency and Market AllocationOutline of Current Lecture II. First Welfare TheoremIII. Adam Smith Theorem IV. Taxes Current LectureFollow 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 Theorema. Unregulated market (laissez-faire) allocation is Pareto efficient. (It maximizes the size of the social pie)b. ASSUME:i. Market structure is perfectly competitiveii. No externalities (my action hurts or benefits others, but I don’t take into account)1. Example: fart or perfume 2. Adam Smith Theorema. “Invisible hand” no matter what, the market creates the biggest surplus possible. b. **FIRST WELFARE=ADAM SMITH=INVISIBLE HANDMarket delivers efficiency. It is not necessarily based on equity.1. Taxesa. Distort decision making in EconlandThese 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 representedby a curve shift (but a wedge is cooler according to Kelvin.)g. P^d=tax+P^sconsumer paid = tax + producer
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