Market Efficiency and Market Failure. Should the Government Control Apartment Rents?. 1. 2. 3. 4. 5. New York City. After studying this chapter, you should be able to: Understand the concepts of consumer surplus and producer surplus.
New York City
Understand the concepts of consumer surplus and producer surplus.
Understand the concept of economic efficiency, and use a graph to illustrate how economic efficiency is reduced when a market is not in competitive equilibrium.
Use demand and supply graphs to analyze the economic impact of price ceilings and price floors.
Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency.
Analyze government policies to achieve economic efficiency in a market with an externality.
… About one million of New York City’s two million apartments are subject to rent control. The other one million apartments have their rents determined in the market by the demand and supply for apartments.
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The Demand Curve is Also the Marginal Benefit Curve
Marginal benefitThe additional benefit to a consumer from consuming one more unit of a good or service.
Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
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Total Consumer Surplus in theMarket for Chai Tea
How much consumer surplus will the owner of this satellite dish receive?
Consumer surplus measures the benefit to consumers from participating in a market, and producer surplus measures the benefit to producers from participating in a market.
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Marginal Benefit Equals Marginal Cost Only at Competitive Equilibrium
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Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus
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When a Market Is Not in Equilibrium There is a Deadweight Loss
Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.
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 where the sum of consumer surplus and producer surplus is at a maximum.
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The Economic Effect of a Price Floor in the Wheat Market
Many economists believe there are better policies than the minimum wage for raising the incomes of low-skilled workers.
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The Economic Effect of a Rent Ceiling
Don’t Confuse “Scarcity” with a “Shortage.”
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Positive and Normative Analysis of Price Ceilings and Price Floors
Whether rent controls 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.
Externality A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
The Effect of Externalities
Private costThe 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 benefitThe benefit received by the consumer of a good or service.
Social benefit The total benefit from consuming a good, including both the private benefit and any external benefit.
The Effect of Pollution on Economic Efficiency
HOW A NEGATIVE EXTERNALITY IN PRODUCTION REDUCES ECONOMIC EFFICIENCY
The Effect of a Positive Externality on Efficiency
HOW A POSITIVE EXTERNALITY IN CONSUMPTION REDUCES ECONOMIC EFFICIENCY
Externalities Can Result in Market Failure
Market failureSituations where 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.
When There is a Negative Externality, a Tax Can Bring About the Efficient Level of Output
Government Solutions to Externalities
When There is a Positive Externality, a Subsidy Can Bring About the Efficient Level of Output
Government Solutions to Externalities
Pigovian taxes and subsidiesGovernment taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.
Command and Control versus Tradeable Emissions Allowances
Command and control approachGovernment-imposed quantitative limits on the amount of pollution firms are allowed to generate, or government-required installation by firms of specific pollution control devices.
Rapid growth in China has led to rapid increases in CO2 emissions.