2. QUIZ – May 5, 2011 1. Property of resource allocation where no one can be made better off without someone being made worse off. 2. Type of efficiency wherein whatever goods are produced go to individuals who value the most.
3. QUIZ – May 5, 2011 3. A condition in the market when Pareto efficiency is not achieved. 4. An unintended impact/effect of an economic activity. 5. Goods that the gov’t compels individuals to consume.
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6. THE INVISIBLE HAND Accdg to Adam Smith, rational people will always pursue their private interests and always leads to public interest With gov’t pursue own self-interest Public interest is served when each individual simply does what is in his own interest.
7. THE INVISIBLE HAND Self-interest will always be pursued than to do good to society Know what is good for you, but you don’t always know what is good for everyone
8. THE INVISIBLE HAND Producers wanna make profit if there’s demand (willingness to pay), they will produce it If there’s a cheaper way of producing, they will try to find that way WILL ALWAYS BE EFFICIENT
9. WELFARE ECONOMICS Concerned with normative (what ought to be) What should be produced, how should it be produced, for whom, who should make these decisions How do we choose among options?
10. PARETO EFFICIENCY Pareto Optimality No one can be made better off without making someone else worse off EFFICIENCY IN ECONOMICS
11. PARETO EFFICIENCY Ec102 D Market To give bonus activity or not? Low grades – you are more than willing to work on it This will LIKELY make everyone better off (except me ) Pareto Improvement
12. PARETO EFFICIENCY Laying asphalt on Ateneo parking lots Those with cars are willing to pay for tuition increase to cover costs Most likely, Pareto improvement Some who don’t have cars or don’t park here are not willing
13. PARETO EFFICIENCY - INDIVIDUALISM Each person is concerned only with his/her own welfare Increase your grades, better parking for your car Not concerned with equality Make those with low grades happy, but no change for A and B+ standing Social tensions
14. PARETO EFFICIENCY - INDIVIDUALISM It is each individual perception that counts. If you think extra credit will make you better, then so be it Consumer Sovereignty Individuals are best judge of their own needs, wants and best interests
15. WELFARE ECONOMICS AND PARETO EFFICIENCY Every competitive market is Pareto efficient Every Pareto efficient resource allocation can be attained through a competitive market mechanism, with the appropriate initial redistributions.
16. CONDITIONS FOR PARETO EFFICIENCY Exchange Efficiency Production Efficiency Product Mix Efficiency All must be satisfied for Pareto Efficiency
17. EXCHANGE EFFICIENCY Whatever goods are produced have to go to individuals who value them the most Chocolate ice cream vs. Vanilla ice cream I want vanilla ice cream, so it should go to me
18. PRODUCTION EFFICIENCY Production of one good cannot be increased without decreasing the production of the other PPF – trade off between two goods If I want more vanilla ice cream, chocolate ice cream should be reduced
19. PRODUCT MIX EFFICIENCY Goods produced correspond to those desired by individuals If ice cream is desired more over apples and ice cream is less expensive to produce than apples, then more ice cream should be produced
31. REALITY Underproduction of some things Support for the arts Cancer research Too little income for others
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33. MARKET FAILURES Imperfect Competition Public Goods Externalities Incomplete Markets Imperfect Information Unemployment, Inflation, Disequilibrium
34. MARKET FAILURES Assume that Ec102 D is a market Each group must prepare a size 4 Identify what kind of market failure is present in the example Every after one example, one rep will give me the size 4 to check
35. FAILURE #1 If for example, the professor does not provide powerpoint slides, no one in the class would want to create powerpoint slides. Moreover, if someone would make it, the quantity would be less than if the prof made all the ppts.
36. #1: PUBLIC GOODS Non-rival: it costs nothing for an additional person to enjoy its benefits Zero MC for the addt’l person enjoying the good Nat’l Defense: Defending 1M people is same cost as defending 1M and 1 Lighthouse: Addt’l ship has no cost
37. #1: PUBLIC GOODS Non-excludable: Difficult or impossible to exclude individuals from the enjoyment If Army successful in driving away terrorists, can’t exclude one person from benefits (safety) Lighthouse: Impossible to prevent other ships not yours to use it
38. #1: PUBLIC GOODS Market will not supply at all or will not supply enough of a public good You will only produce for your own benefit Will not pay private army to defend us all If cost of lighthouse is more than your personal benefit, you will not produce it
39. #1: IDENTIFY IF PURE OR IMPURE Powerpoint Presentations for Ec102 D Lectures in Ec102 D Airconditioning in a closed room Wifi Physical attractiveness of your girlfriend/boyfriend
40. FAILURE #2 Even if you don’t break a sweat by opening the windows in the morning, you still don’t want to open them yourself I cannot use the projector if the blinds are not down
41. #2: INCOMPLETE MARKETS Private markets fail to provide a g/s even though the cost of providing it is less than what individuals are willing to pay Insurance Crop insurance Fire insurance
42. #2: INCOMPLETE MARKETS Transactions Cost – costly to provide new services and unsure if it will be profitable Asymmetries of Info – one party less informed than the other, therefore induces uncertainty and fear
43. #2: INCOMPLETE MARKETS Adverse Selection – bad results occur as a result of asymmetry of info Lemons Problem Too risky, markets for this will not exist, or if it exists, will not be large Example: When you get heartbroken once, you lose hope in love
44. #2: INCOMPLETE MARKETS Complementary Markets – market of complementary goods If one is not produced, the other will not be produced Coffee and tea Shoes and socks If you don’t give me output, no grades
45. FAILURE #3 Only I have the sole control of what grade to put in your AISIS Only Jer has the responsibility of getting the speakers Only girls have their period
46. #3: FAILURE OF COMPETITION Monopoly, monopolistic competition, oligopoly Perfect Competition: P=MC P =MB, MB=MC Imperfect Competition: MR=MC MR<P since MR=P-revenue foregone
48. FAILURE #4 Unless I call on people, very few will recite and give me the information that I need During an exam, unless you ask me, I won’t explain the question to you
49. #4: IMPERFECT INFORMATION Market by itself will supply too little information Information is a public good. Public goods are not produced at all or sufficiently by private market. Example: Loans
