Chapter 6 Flashcards
(16 cards)
Economic Efficiency
- Productive and allocative efficiency
- Produce maximum output
Productive Efficiency
- firm produces at the lowest possible cost
- producing when AC=MC
Allocative Efficiency
- firms produce the goods that consumers want the most
- cannot be known by PPC
Pareto Optimality
- impossible to make someone better off without making someone else worse off
What does pareto optimality not consider?
Income distribution
Dynamic efficiency
Differentiates between firm and economy
What happens when a firm is more dynamically efficient?
produces at lower AC/ better quality of products/ efficient response to market changes
What happens when an economy is more dynamically efficient?
Efficient reallocation of resources
What is market failure?
Market forces of D and S do not achieve efficient allocation of resources
Causes of market failure
- lack of markets
- existence of externalities
- lack of competition
- info failure
- failure of markets to clear
Positive externality
- production: benefits of prod (MPC >MSC)
- consumption: benefits of consumption (MSB>MPB)
Negative Externalities
- production: MSC>MPC
- consumption: MPB>MSB
Social costs
Private costs+external costs
Social benefits
Private benefits + external benefits
Cost benefit analysis
Method of decision making process used to assess the desirability of a project by assessing cost and benefit
Framework of CBA
- identification
- monetary evaluation
- forecasting future consequences
- decision making
