© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/OBrien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 4 Market Efficiency.

© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e.

Fernando & Yvonn Quijano

Prepared by:

Chapter

4

Market Efficiencyand Market Failure

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2 of 35© 2009 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.

Price ceiling A legally determined maximum price that sellers may charge.

Price floor A legally determined minimum price that sellers may receive.

Market Efficiency and Market Failure

Externality A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

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Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Marginal benefit The additional benefit to a consumer from consuming one more unit of a good or service.

4.1Consumer Surplus and Producer Surplus

Consumer Surplus

Learning Objective 4.1

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Consumer Surplus and Producer Surplus

FIGURE 4-3

Total Consumer Surplus in the Market for Chai Tea


Consumer Surplus

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The Consumer Surplus fromSatellite Television

Consumer surplus allows us to measure the benefit consumers receive in excess of the price they paid to purchase a product.

Makingthe

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Producer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives.

Marginal cost The additional cost to a firm of producing one more unit of a good or service.

Producer Surplus


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Producer SurplusFIGURE 4-4

Calculating Producer Surplus



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Consumer surplus measures the net benefit to consumers from participating in a market rather than the total benefit. The net benefit equals the total benefit received by consumers minus the total amount they must pay to buy the good.

Similarly, producer surplus measures the net benefit received by producers from participating in a market, or the total amount firms receive from consumers minus the cost of producing the good.

What Consumer Surplus and Producer Surplus Measure


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The Efficiency of Competitive Markets

FIGURE 4-5

Marginal Benefit Equals Marginal CostOnly at Competitive Equilibrium

Marginal Benefit Equals Marginal Cost in Competitive Equilibrium


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FIGURE 4-6

Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus

Economic Surplus


Economic surplus The sum of consumer surplus and producer surplus.

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FIGURE 4-7

When a Market Is Not in Equilibrium There is a Deadweight Loss

Deadweight Loss

Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.


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Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum.

Economic Surplus and Economic Efficiency


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Government Intervention in the Market:Price Floors And Price Ceilings

FIGURE 4-8

The Economic Effect of a Price Floor in the Wheat Market

Price Floors: Government Policy in Agricultural Markets


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Price Floors in Labor Markets: The Debate Over Minimum Wage Policy

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FIGURE 4-9

The Economic Effect of a Rent Ceiling

Price Ceilings: Government Rent Control Policy in Housing Markets

Don’t Let This Happen to YOU!Don’t Confuse “Scarcity” with a “Shortage”


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Black Markets

Black markets A market in which buying and selling take place at prices that violate government price regulations.


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Solved Problem 4-3What’s the Economic Effect of a “Black Market” for Apartments?


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The Results of Government Price Controls: Winners, Losers, and Inefficiency

When the government imposes price floors or price ceilings, three important results occur:


• Some people win.

• Some people lose.

• There is a loss of economic efficiency.

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Positive and Normative Analysis of Price Ceilings and Price Floors

Whether rent controls or federal farm programs are desirable or undesirable is a normative question.

Whether the gains to the winners more than make up for the losses to the losers and for the decline in economic efficiency is a matter of judgment and not strictly an economic question.


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Private cost The cost borne by the producer of a good or service.

Social cost The total cost of producing a good, including both the private cost and any external cost.

Private benefit The benefit received by the consumer of a good or service.

Social benefit The total benefit from consuming a good or service, including both the private benefit and any external benefit.

Externalities and Economic Efficiency

The Effect of Externalities

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FIGURE 4-10

The Effect of Pollution on Economic Efficiency

How a Negative Externality in Production Reduces Economic Efficiency

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How a Positive Externality in Consumption ReducesEconomic Efficiency

FIGURE 4-11

The Effect of a Positive Externality on Efficiency

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Externalities May Result in Market Failure

Market failure A situation in which the market fails to produce the efficient level of output.

What Causes Externalities?

Property rights The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

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Government Policies to Deal with Externalities


FIGURE 4.12

When There Is a Negative Externality, a Tax Can Bring about the Efficient Level of Output

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Solved Problem 4-5Using a Tax to Deal witha Negative Externality


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FIGURE 4-13

When There Is a Positive Externality, a Subsidy Can Bring about the Efficient Level of Output

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Pigovian taxes and subsidies Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.

Command and Control versus Tradable Emissions Allowances

Command and control approach An approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.


© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/OBrien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 4 Market Efficiency.

Documents

consumer surplus slide

producer surplus slide

total consumer surplus

sum of consumer surplus

producer surplus figure

market efficiency

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