1 / 25

It’s All About Efficiency…

It’s All About Efficiency…. And so we begin again…. Public policy encourages, discourages, prohibits, or prescribes private actions We base everything on the idea of a perfectly competitive economy Market failures are private choices that violate the perfect economy. The Benchmark. Utility

jmusic
Télécharger la présentation

It’s All About Efficiency…

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. It’s All About Efficiency…

  2. And so we begin again… • Public policy encourages, discourages, prohibits, or prescribes private actions • We base everything on the idea of a perfectly competitive economy • Market failures are private choices that violate the perfect economy

  3. The Benchmark • Utility • Assumptions of consumption: • More we have, the more utility we have • Declining marginal utility • Assumptions of production: • Buy factor inputs to produce goods for sale • Additional unit of output requires same units of input as predecessor • Leads to Pareto Efficiency • Can’t find an allocation that makes one person better without making at least one worse

  4. How Do We Measure Changes in Efficiency? • Social Surplus • Net benefits from competing in markets

  5. Caveats • General equilibrium model is static rather than dynamic • Can never be complete • Assumptions are often violated in reality

  6. What if the Invisible Hand Gets Confused??? • Market failures are private choices that violate the perfect economy • Market failures constitute the most commonly advanced rationales for public policy • Collective action can allow us to improve efficiency • Social surplus is larger under alternative than under market equilibrium

  7. 1) Public Goods • Nonrivalrous, nonexcludable, congestable • Shoe example

  8. Public Goods Follow-Up • P. 87-88 example • Prisoner’s dilemmas and Nash equilibriums

  9. 2) Externalities • Positive or negative • Examples?

  10. 3) Natural Monopoly • Single firm can produce at lowers cost than any other arrangement • If you force it to price efficiently, it leaves. If you allow it to price where it wants, you take a deadweight loss. • X-Inefficiency • Natural monopoly that doesn’t reach minimum costs

  11. 4) Information Assymetry • Amount of information about the characteristics of a good varies in relevant ways across persons • Search v. experience v. post-experience • Examples?

  12. So Those Are the Big Four… • But there are many other limitations of the competitive framework…

  13. Thin Markets • Few buyers or sellers • Monopsony • Oligarchy

  14. Preference Problems • Endogenous • Self-regarding • Other-regarding • Process-regarding

  15. Uncertainty Problems • Two-period worlds lead to more complex decisions • Ski example • Insurance • Risk v. uncertainty • Law of large numbers • Moral hazards • Subjective perception of risk (flood/earthquake)

  16. Uncertainty Problems • Prospect Theory

  17. Intertemporal Allocation Problems • Contracts in present for future production and delivery • What about future generations? • How do we know their wants/needs?

  18. Adjustment Costs • Economy is never static like we wish to assume • Epidemic on eggs… • Oil embargo and Iranian revolution…

  19. Macroeconomic Dynamics • Business cycle • Fiscal v. monetary policies

More Related