cid 127 Welfare Economics the study of how the allocation of resources affects economic well being cid 127 Quantify the inefficiency of policies designed to promote equity in order to weigh the cost and benefits Efficiency Society will be better off if we are able to produce more goods and service The more stuff we have the better off we are All things equal cid 127 Willingness to pay the maximum amount someone is willing to pay for a good At any Q the height of the Demand curve is the WTP of the Marginal buyer the buyer who would leave the market if pricer were any higher The size of the pie How much of the good is produced the amount that maximizes total surplus cid 127 Which producers produce the good the producers with the lowers cost cid 127 Which consumers consume the good the consumers who value it the most those who do not value the good at the equilibrium price will not buy it Equity distribution of society s goods the size of the slices of the pie There is a general sense that some ways of distributing the goods across the members of society Demand curve willingness to pay curve the consumer surplus of the marginal buyer is 0 Components of how to measure the efficiency of an outcome Consumer Surplus is the difference between a buyer s willingness to pay and the price cid 127 measures the benefit buyers receive from participating in the market equal to a buyer s willingness to pay minus the amount that is actually paid wtp p a higher price reduces CS due to remaining buyers paying a higher price on a graph consumer surplus it the area below the demand curve and above the price cid 127 Willingness to sell Cost the value of everything a seller must give up to produce a good cost is a measure of willingness to sell cid 127 measures the benefit sellers receive from participating in the market PS Price cost on a graph producer surplus is the area above the supply curve ad below the price Total Surplus consumer surplus Producer surplus Any price other than the equilibrium price will restrict trade and result in a loss of total surplus cid 127 measures total gain from trade only relevant for people who are willing and able to pay for goods not the poor or elderly cid 127 Market equilibrium P and Q maximizes total surplus Price Floor a legal minimum price at which a good can be traded A Non Market outcome EX agricultural subsidies Cotton wheat soy the free market satisfies the first component of efficiency cid 127 Market failures equity goals cid 127 Market sometimes fail to produce efficient outcomes Society may have equity goals providing for the poor or elderly Efficiency Total surplus value to buyers cost to sellers An allocation of resources is efficient if it maximizes total surplus includes cot of all resources used to produce a good including the value of the seller s time a seller will only produce and sell the good if the price exceeds his cost At each Q the height of the S curve is the cost of the marginal seller the seller who would leave the market if the price were any lower Producer Surplus is equal to the price a producer receives for his product minus the cost of producing the product cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Raising or lowering the quantity of a good would not increase the total surplus The goods are being produced by the prod era with lowest cost The goods are being consumed by the buyers who value them most highly cid 127 Market failures when markets fail to allocate resources efficiently cid 127 Market power the ability to influence the price not a price taker cid 127 Monopoly single sellers cid 127 Oligopoly When a group of sellers act together in order to gain market power act as a monopoly Externalities When market activity produces side effects costs or benefits to people who are not buyers or sellers There are some goods which by their nature are not suited for production and consumption in markets ex pollution Public goods i e bridges Common resources cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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