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Socially Efficient and Inefficient Market Outcomes

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Socially Efficient and Inefficient Market Outcomes

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8 views14 pages

Socially Efficient and Inefficient Market Outcomes

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parminderpcs

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Socially Efficient and

Inefficient Market Outcomes


Allocative Efficiency (Socially Optimal)
• Price = Marginal Cost
• Also shown as equilibrium on a
market graph
• Total economic surplus is maximized
at this point (Consumer + Producer
Surplus)
1. A couple of things
to notice- the
demand curve is Price
consumers
marginal benefit,
and the supply S=MC
curve is producers
marginal cost.
2. If you’re at
equilibrium, then
p
MB=MC
3. In addition, this is
also known as the
socially efficient
quantity, so it’s
also where D= MB
MSB=MSC q Quantity
Deadweight Loss
• What is deadweight loss? The
simple definition is it’s a loss of total
(consumer + producer) surplus.
• Deadweight loss occurs anytime you
move away from equilibrium due to
government interference or
externalities.
What graphs show deadweight loss?
• Monopoly
• Monopolistic
• Tax graphs
• Price Ceiling/Price Floor
• Positive Externalities
• Negative Externalities
• (But not a market in equilibrium or a perfectly competitive firm in the
long-run)

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