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Efficiency and Exchange

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Objectives:At the completion of this section, the student should

1. Understand and describe the importance

and determination of efficiency in the

market.

2. Graph and manipulate the graphs for

demand and supply descriptions of

goernmental interentions in the

market.!ubsidy

Efficiency

"ax

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Efficiency

#annot help one $ithout hurting another %f &arginal benefit ' &arginal cost,

increase output

%f &arginal benefit ( &arginal cost, decrease output

Efficiency()'&arginal *enefit)&arginal #ost

%n markets happens at +,! intersection Efficiency is most output, gien input

Euity is -fairness

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Effect of /rice too high on

Efficiency

/

0

+

!

/1

0!10+1

#onsumer !urplus

/roducer

!urplus

Deadweight

Loss

#ant get surplus on

units not produced.

*enefit ' #ost, but units

3ot produced.

*ene

#ost

0!1' 0+1, ) Excess !upply

Aboe euilibrium

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Effect of /rice too lo$ on Efficiency

/

0

+

!

/1

01

/roducer !urplus

#onsumer !urplus

/24belo$ market5

02

Dead Weight Loss

- Lost Consumer Surplus

- Lost Producer Surplus

46e$er !upplied

At lo$er price5

7o$ price conerts some

producer surplus to

consumer surplus

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Effect of !ubsidy on Efficiency

/

0

+

!

/1

01

Consumer Surplus

!, net of subsidy

02

Cost of the subsidy

!"# per unit subsidy

Cost to society$

Paid to consumers%

Additional consumer surplus

Dead weight loss

&dded cost without more benefit%

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%ncidence of a "ax

8ho physically pays the tax is not issue

8ho has less alue due to the tax is issue

%f the demander is -$illing to pay a lot ofthe tax 4has 798 price elasticity5,

consumer pays most of the tax

%f supplier -really $ants to sell the product

4lo$ supply elasticity5, seller pays most of

the tax.

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3umeric Example of "ax %ncidence

'he effect of a ta# on gasoline

/ 0s 0d !old "x /;tx 0s 0d !old #ons #st /rod re "x re

2.= >?? 2?? ?.=

2.2= ==? 2=? ?.=

2 =?? @?? ?.=

1.= B=? @=? ?.=

1.= B?? B?? ?.=

1.2= @=? B=? ?.=

1 @?? =?? ?.=

?.= 2=? ==? ?.=

2??

2=?

@??

@=?

B??

@=?

@??

2=?

@.?

2.=

2.=

2.2=

2.?

1.=

1.=

1.2=

=??

B=?

B??

@=?

@??

2=?

2??

2=?

@??

@=?

B??

B=?

2??

2=?

@??

@=?

@??

2=?

=??

=>2.=?

>??

>12.=?

B=?

@12.=?

B??

B@.=?

B=?

B@.=?

@??

1C.=?

1??

12=

1=?

1=

12=

1=?