Efficiency and EquityMicro-economie Foundation Alaleh Mani2011

Self Interest, Social Interest Make a choice to get out most of scarce

resources Social Interest has two dimensions Efficiency

Fairess

Resource allocation (Alternative nonmarket) Methods

Methods Definition Advantages Disadvantages

Example

Command Rule of order organization with clear responsibilities monitoring

Big system ,no monitoring.Delivering food in north Korea

Allocate labor inside firms

Majority rule Rule of vote If it affects manyCommon resource

self interest and Bureaucrats

tax for health or education in vote

Contest Rule of Winner Motivation Need Monitoring

Prize to motivate

First come first served

Rule of first Resource allocate to one in sequence

High way no reservation Restaurant

Lottery Rule of luck No distinction found

Give land to airlines Fishing rightSpectrum cell phone

Personal characteristic

Rule of Right personality

Marriage partner Skin color and gender discrimination

Allocation job to whites

Force Rule of crucial Enforcing law, courtsTransfer wealth to poortax

Feel living in safety due to rules

War theft

Market Price Rule of value Choose not to use up if no need

Those who can not afford

School ,doctor fee

Demand and Marginal Benefit Demand= Value the seller get=Price the

buyer pay=Marginal benefit D=MB ∑(individual demand)=Social demand market demand curve=economy’s

marginal benefit curveMSB=Market DemandPrice=#of $ you pay to lose other goods or

services to obtain this good or service

Consumer Surplus

Marginal Social

Benefit=MBS

Value or Marginal benefit of good minus the price paid ,summed over quantity bought

Supply and Marginal Cost Supply=Marginal cost=Minimum supply

price S=MC ∑(individual Supply)=Market demand market supply curve=economy’s

marginal social cost curveMSC=Market Supply

Producer SurplusPrice received minus its minimum supply price or marginal cost, summed over quantity sold

Equilibrium in Market

Elasticity and Surplus

Efficiency and invisible hand

Underproduction and Overproduction DWL=Deadweight loss=Scale of

inefficiency: Inefficiency in production decrease the

surplus

ShortageUnder Production

WasteOver production

Obstacle to EfficiencyMarket Failure Cause Underproduction or

Shortage and Overproduction or Waste: Price and Quantity regulation Taxes and subsidies Externalities Public goods and Common resources Monopoly High Transaction Costs

Obstacle Definition results Examples Nonmarket method

Price and Quantity regulation

Limitation By regulation

Underproduction

Minimum WageRent Cap, ceilingLimit permission of Production

Tax Increase the price to pay decrease the price to receive

Underproduction

subsidies Decrease the price to pay ,increase the price to receive

Underproduction

Government payment to producers

Externalities

Cost for other than buyer and seller

Overproduction

Contamination, phone in public

Benefit for other than buyer or seller

Underproduction

Smoke detector,

Public good Consumer same time no pay Free_RIDER

Underproduction

National defense, Law enforcement

common resources

No owner, everyone use and put the cost on othersTragedy of Commons

Overproduction

Atlantic Salmon Majority rule

Monopoly Sole provider of a good ,price maker

Underproduction

High transaction cost

Opportunity cost of making trades in Market

Underproduction

Retail use capital and laborWaiting to use free lot to play tennis

Command RuleFirst come first served

Under Production cause:1. Long line or Queue2. Wasting time3. Black Market4. rubbery

Over production cause:1. Waste2. Destruction3. Illnesses

Fairness of Market Victim of natural disaster Low skilled workers under living wage Principals of fairness is universally

vague Make the economic pie greater in lowest

cost No equity

Games have rules and result

Economy as a game

Fair result

Same desire and capacity

The wealthier the lesser MBBoth better off

Fair rules …Symmetry Principal

Utilitarian

The big tradeoff

The Big TradeoffCost of Income

transfer:Income Tax

Employment

Work less

Capital

Save less

Less Quantity

Economy Shrink

Administration Costs

Transfer Costs

Tax collecting

agency, IRSWelfare administrati

ng, Healthcare

sysTax payer CostsAccountantLawyerAuditor

Modified version of Utilitarian Theory of Justice :

1. Lowe tax2. Consider all transfer and administration cost

Symmetry Principal: 3. Behave toward others same as you expect them behave

toward you (religion)4. Equality in opportunity (economy)

Nozick Principals1.Protect Private Property by enforcing law =every thing

has an owner, theft is prevented ,strong will not prevail 2.Private Property can only exchange voluntary=no theft

In Competitive Market, respect to private property right and voluntary exchange without 6 obstacle, resources would be fair and efficient.