© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e.
Fernando & Yvonn Quijano
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Chapter
4
Market Efficiencyand Market Failure
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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
Learning Objective 4.1
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
Connection
Learning Objective 4.1
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Consumer Surplus and Producer Surplus
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
Learning Objective 4.1
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Producer SurplusFIGURE 4-4
Calculating Producer Surplus
Learning Objective 4.1
Consumer Surplus and Producer Surplus
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Learning Objective 4.1
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
Consumer Surplus and Producer Surplus
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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
Learning Objective 4.2
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The Efficiency of Competitive Markets
FIGURE 4-6
Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus
Economic Surplus
Learning Objective 4.2
Economic surplus The sum of consumer surplus and producer surplus.
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The Efficiency of Competitive Markets
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.
Learning Objective 4.2
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The Efficiency of Competitive Markets
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
Learning Objective 4.2
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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
Learning Objective 4.3
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Price Floors in Labor Markets: The Debate Over Minimum Wage Policy
Makingthe
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Learning Objective 4.3
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Government Intervention in the Market:Price Floors And Price Ceilings
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”
Learning Objective 4.3
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Government Intervention in the Market:Price Floors And Price Ceilings
Black Markets
Black markets A market in which buying and selling take place at prices that violate government price regulations.
Learning Objective 4.3
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Solved Problem 4-3What’s the Economic Effect of a “Black Market” for Apartments?
Learning Objective 4.3
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Government Intervention in the Market:Price Floors And Price Ceilings
The Results of Government Price Controls: Winners, Losers, and Inefficiency
When the government imposes price floors or price ceilings, three important results occur:
Learning Objective 4.3
• Some people win.
• Some people lose.
• There is a loss of economic efficiency.
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Government Intervention in the Market:Price Floors And Price Ceilings
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.
Learning Objective 4.3
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Learning Objective 4.4
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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Learning Objective 4.4
Externalities and Economic Efficiency
The Effect of Externalities
FIGURE 4-10
The Effect of Pollution on Economic Efficiency
How a Negative Externality in Production Reduces Economic Efficiency
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Learning Objective 4.4
Externalities and Economic Efficiency
The Effect of Externalities
How a Positive Externality in Consumption ReducesEconomic Efficiency
FIGURE 4-11
The Effect of a Positive Externality on Efficiency
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Learning Objective 4.4
Externalities and Economic Efficiency
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
Learning Objective 4.5
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
Learning Objective 4.5
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Government Policies to Deal with Externalities
Learning Objective 4.5
FIGURE 4-13
When There Is a Positive Externality, a Subsidy Can Bring about the Efficient Level of Output
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Learning Objective 4.5
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.
Government Policies to Deal with Externalities