These slides will give you an overview of Environmental Economics in Health and its application in Health Field.

1. Environmental
Economics in Health
Prepared By: Mlay – SPHSS
MUHAS © 2016

2. PART ONE: Introduction
Definition: Economics and Environment
• A broad definition of the environment might be the surroundings: the
conditions influencing development or growth.
• Thus, you might include any number of things that are around you as being
part of our environment.
• For example, the environment can be defined to include all flora and fauna,
aquatic ecosystems, energy and material resources, and the atmosphere
(Hanley et al 2007).

3. Introduction cont. …
• Economics is the study of how people allocate their limited resources in an
attempt to satisfy their unlimited wants.
• The subject matter of economics lies on the production, distribution and
consumption of economic goods. How much should be spent on education,
health, books, travel etc.
• Can you think of an example from your country where a natural resource is
used in a production process, resulting in both a product for use by
consumers and a waste product?

4. Introduction cont. …
Supplier of environmental or amenity goods
• Economic benefits (ie increased utility) may be directly derived from the
consumption of the flow of services that are forthcoming from a stock of
environmental goods.
• There are many examples of where the environment provides amenity benefits for
society. For example, some countries enjoy beautiful landscapes and the public
benefit from these via their associated recreational services and tourism.
• Environmental stocks of trees can offer global services such as climatic regulation
because the trees absorb carbon dioxide, which might otherwise contribute to
climate change.
• Many people get enjoyment from the biodiversity that exists in the world, and this
can also be considered as a form of public consumption of an environmental good.

5. Introduction cont. …
Waste sink capacity
• This is the capacity of the environment to assimilate the waste products of
production and consumption and convert them into harmless or ecologically
useful products.
• This use of the environment is the one we are most concerned with in this
module, as we look at the introduction of policies which affect how, and at
what level, the environment is used as a waste sink.
• The environment is not only affected by waste products but also by
intentional releases of chemicals, such as pesticides, wood preservatives,
paints, and lubricants.

6. Introduction cont. …
Natural Laws that govern environment (Laws of thermodynamics)
• Thermodynamics is the study of the effects of work, heat and energy on a
system. It is only concerned with macroscopic (large-scale) changes and
observations.
• First Law of thermodynamics: the first law states that whenever energy is
converted in form, its total quantity remains unchanged. In other words,
energy (or matter) can be neither created nor destroyed.
• Common and Stagl (2005) use the example of coal-fired electricity
generating plant. The coal is heated which produces electricity. A by-product
of this process is waste heat that is transported away as cooling water or
gases. In addition, various waste gases are emitted into the atmosphere,
which cause pollution, such as acid rain.

7. Introduction cont. …
• Second Law of thermodynamics: this law state that in a closed system,
entropy does not decrease.
• Entropy could be described as a measure of the ‘disorderedness’ of energy.
For instance, ordered energy is useful and an example of this is the energy
stored in a battery. However, disordered energy is not useful, and an example
is the energy dispersed into the environment by a fire.

8. Origin of environmental economics
• Environmental economics developed in its present form in the 1960s as a
result of the intensification of pollution and the heightened awareness
among the general public in Western countries about the environment and its
importance to our existence.
• Economists became aware that, for economic growth to be indefinitely
sustainable, the economic system needs to take into account the uses of the
environment that we have already mentioned
• So that natural resources are not depleted and so that the environment is not
overused as a waste sink.

9. Origin cont. …
• Environmental economists view the environment as a form of natural capital
which performs life support, amenity, and other functions that cannot be
supplied by man-made capital.
• This stock of natural capital includes natural resources plus ecological
systems, land, biodiversity, and other attributes.
• The growth of environmental economics in the 1970s was initially within the
neo-classical paradigm.
• In general, this approach to the environment is concerned with issues of
market failure, inappropriate resource allocation, and how to manage public
goods.

10. Origin cont. …
• There was little concern for the underlying relationships between the
economy and the environment.
• Concerns about the limits of this approach to environmental economics led
some environmental economists to develop what is now referred to as
Ecological Economics.

11. Scope of Discipline
• Three broad Questions
1. What are the economic and institutional causes of environmental
problems?
2. How can we assess the economic importance (ie monetary value) of
environmental degradation/improvements?
3. How can we design economic incentives to slow or halt environmental
degradation and bring about improvements in the quality of the natural
environment?
• The first question leads to an analysis of market failure and government
failure.

12. Scope of Discipline
• For example, one of the principal reasons for market failure is that there are
incomplete markets for environmental assets. By incomplete we mean there
are many cases where no market exists for the efficient allocation of an
environmental resource. There are plenty of examples of where markets are
incomplete including:
1. Clean air
2. Beautiful view
3. Unpolluted beach
4. Tropical rainforests, with their biodiversity and their carbon-fixing
properties
5. A quiet environment

13. Scope of Discipline
• The second question requires that we are able to place economic values on
environmental degradation/improvements.
• As we have already noted, many environmental resources and goods are not
priced in markets.
• Thus, to do this, environmental economics has developed a set of methods
to place values on these types of goods.
• To address the third question we will use economic tools to critically
evaluate environmental policies and whether they are likely to achieve the
aims of decreasing or halting environmental degradation.

14. Basic Economic Principles
• Positive economics: is objective and fact based. (Positive economics is
concerned with the development and testing of positive statements about
the world that are objective and verifiable.
• Positive economics statements do not have to be correct, but they must be
able to be tested and proved or disproved, describe the way things out to be...
• Example: The statement, “Removing Common Agricultural Policy (CAP)
will raise farm prices in developing countries”

15. Basic Economic Principles cont. …
• Normative economics: is subjective and value based. Normative economic
statements are opinion based, so they cannot be proved or disproved,
describe things the way they are …
• Normative statements derive from an opinion or a point of view. Thus the
words ‘should’, ‘ought to’ or ‘it is better to’ frequently occur. The validity of
normative statements can never be tested.
• For example, the normative statement ‘the subsidies of the European
Union’s Common Agricultural Policy (CAP) should be removed’

16. Applying scientific methods of reasoning
• Scientific reasoning involves constructing theories to explain how the world
works. In general, the simplest explanation is preferred.
• For example
• We have the following information about the world – supermarkets are selling more
organic apples than before – and we want to know why this is the case.
• Now we construct a theory – the volume of organic apple sales depends upon the price
at which they are sold – this is a positive statement.
• Next we state a hypothesis – the volume of organic apples that a supermarket will sell
rises if it reduces the price of organic apples – another positive statement.
• Then we test it by looking for evidence to support the price-sales link in different
countries and for different time periods.

17. Applying scientific methods of reasoning …
• If the evidence supports the hypothesis
• we accept it, and
• move on to more refined hypotheses, such as those relating to what extent consumer
respond to price changes.
• If the evidence does not support the hypothesis, we either
• modify the hypothesis, or
• reject it.
• This process of trial and error gradually leads to a theory that fits well with
experience. It enables the economist to
• explain what has happened
• say what might happen in the future when prices change

18. Applying scientific methods of reasoning …
• Can the theory be tested?
• Yes, but it depends on an idea and the way you framed it.
• What happens if the hypothesis is not testable?
• Frame the ideas on how the world works in such a way that evidence can be found to
support or reject the idea
• If you have unmeasurable variable in your ideas you want to test, the way round is to
use a proxy variable – the variable that reflects the characteristics of the other
(unmeasurable one)
• Example: environment quality and prevalence of diseases (find proxy for environment
quality): concentrations of carbon monoxide; nitrogen oxides; DDT and PCB
contamination of fish; World Bank’s environmental sustainability index.

19. Applying scientific methods of reasoning …
• Why do economist make assumptions
• Assumptions save time and concentrate the mind on the problem to hand, and when well-
proven become part of the body of established knowledge.
• The use of assumptions in economics also relates to the need for an analytical method that
provides clarity, scientific rigor, and flexibility
• Consider the theory represented by the positive statement that we made earlier: ‘the
volume of organic apples that a supermarket will sell rises if it reduces the price of
organic apples’.
• The theory is stated with the assumptions that: (a) the quality of apples remain
constant (b) consumers are made aware of the price fall and (c) consumers prefer
more apples to fewer apples
• The use of these assumptions helps clarify the relationship between organic apple
sales and organic apple prices.

20. Terminology and Basic concepts
• Economic agents - individuals, consumers, managers, business owners,
shareholders, or workers. In fact, an economic agent is anyone who acts in
an economic way, allocating resources to satisfy wants.
• Markets: this definition depend much on the context;
• Location; is a place or location where goods and services are sold and exchanged but
nowadays the exchange does not necessarily take place at a specific location
• Appropriate Definition; A mechanism by which buyers and sellers of goods and
services are brought together for the purpose of exchange
• Efficiency; signifies a level of performance that describes a process that
uses the lowest amount of inputs to create the greatest amount of outputs,
for example one medicine to treat more than two diseases (based on
maximizing benefits and minimizing costs)

21. Opportunity Cost
• Simple defn.: the next best alternative that is foregone
• More details: An opportunity cost is the cost of an alternative that must be
forgone in order to pursue a certain action. Put another way, the benefits you could
have received by taking an alternative action.
• Example: chopping down a forest you get wood and other related materials but
loose opportunities to use the forest for alternative purposes, such as for recreation,
or to provide environmental benefits
• Mathematical example; Say you plant trees in sources of water in region ‘A’ and it
returns is 10,000 lts of water per month after 10 years. In planting trees in region
‘A’, you gave up the opportunity of planting trees - say, in region ‘B’ yielding a
return of 28,500 lts of water per month after 10 years. Calculate opportunity cost??

22. Productivity
• Productivity is an economic measure of output per unit of input. Inputs
include labor and capital, while output is typically measured in revenues and
other GDP components such as business inventories.
• Productivity is usually used in relation to labor, but can be measured in terms
of the output per unit of any factor of production/inputs.
• For example; Labor productivity measures the amount of goods and
services produced by one hour of labor, For example, suppose a Fishermen
wants to calculate the productivity of all the employees at his Fish company.
The Fishermen calculates that the fish company had an output of 30,000 fish
last month, while the its input was 3,000 hours of labor. The productivity for
the fish company is 10 (30,000 divided by 3,000); this means the employees
harvest 10 fish per hour in the previous month.

23. Marginal Analysis
• Is the analysis of the relationships between changes in related environmental
economic variables (revenue, cost, production, harvest, extraction, etc.).
• For Example; if we extract another liter of oil from the ground will the cost
of extraction be more or less than the benefit obtained. If the benefit is
greater than the cost we would proceed.
• Important ideas developed in such analysis include marginal cost, marginal
revenue, marginal product, marginal rate of substitution and marginal
propensity consume.

24. <<<<END>>>>

25. PART TWO: Methods and Tools of Economic
Analysis
• Neo – classical Economic Model
• Model of perfect competition
• The assumption of this model allows us to identify important aspects of economic
behavior as well as economic outcome of such behavior
• Perfect competition
• The main focus of the neo-classical model is on the question of how
resources can be allocated most efficiently. It promotes the development of
freely competitive markets in which individuals are given as much economic
freedom as possible; the individual is left to decide what to buy, what to
produce, and what to sell.

26. Perfect Market
• Ideally, the market should resemble as closely as possible the model of
perfect competition. Theory can show that a perfectly competitive market
can result in the most efficient allocation of resources.
• From the narrow viewpoint of economic theory this can be termed the
optimal result for society, or the socially optimal outcome.
• This theoretical result applies both to a single market and to all the markets
in an economy if all could be perfectly competitive.
• Thus, if markets work badly, according to this theoretical model the
government has a duty to individuals and to society to correct this, i.e.
governments should intervene to correct market failure.

27. Perfect Market
• Defn; the market structure with a lot of criteria (assumptions) to justify it.
• This model rest on the number of different assumptions;
1. Rationality: the first assumption made is that people are economically
rational, preferring more of those goods and services they value to less.
• Rational economic man and woman has objectives, and attempts to
maximize them, in Neo-classic economics it state as follows;
• Consumers allocate their incomes in order to maximize their satisfaction
(utility) from the goods and services they consume
• Producers allocate resources in order to maximize their profits

28. Assumptions cont. …
2. Perfect Knowledge; economic agents make decisions in the light of perfect
knowledge i.e.
• buyers and sellers know all the prices of all the goods in the market,
• know everything they need to know about the quality of goods,
• the character of other economic agents, what gvt is going to do next and so on.
3. Many Participants; consists of many buyers and sellers, meaning that all are
price takers and an individual participant has no influence on market prices.
4. No barriers to enter or exit the market; truly competitive market imply that
there is a scope for new buyers and sellers to enter the market, and for old
participants to leave the market.

29. Assumptions Cont. …
5. Homogeneous commodities: This assumption requires that the good or
service associated with a particular market is identical in all respects.
• For example, in the apple market all apples are assumed to be of equal size,
shape, color, taste, origin etc.
• In other words there is nothing to distinguish one apple in the market from
another.

30. Methods of economic analysis
• Economics uses three ways to describe a theory
1. Mathematical (Algebra); Algebra is the most concise way of describing economic
theories, and much of economics can be expressed in a few pages using calculus.
• The models developed in this way can capture static or dynamic relationships as well as
being partial or general equilibrium analysis.
2. Graphs or diagrams; Diagrams are useful because they allow you to picture a
relationship. From a diagram it is possible to capture at a single glance something
that may take several paragraphs of text to describe in words.
• The most commonly used diagram in economics is the one that depicts supply and demand,
an upward sloping line/curve (supply) intersecting with a downward sloping line/curve
(demand) in the shape of an x. We shall be examining this diagram in the next unit.

31. Methods of economic analysis cont. …
3. Words (progressive logical explanations); We use words every day, so
many people find that introductory economics is most accessible when
presented in narrative form. The trouble is that words can be ambiguous,
vague, and long-winded

32. Demand and Supply analysis
• Definition of Demand: Need + ability and willingness to pay for a commodity
• The schedule of amounts of any product that buyers will purchase at different
prices during some stated time period.
• Or Demand is the amount of a good that consumers are willing and able to buy at a
given price.
• Market for good environment involve two groups: the buyers and the sellers,
who interact to trade good environment.
• We all want good environment and so most of us would be prepared, if necessary,
to pay for good environment.
• Demand can either be real or effective demand; real demand-amount of goods or
services consumers aspire to consume; effective demand-amount of goods and
services consumers they do consume

33. Demand
• Question: Differentiate between demand and need
Factors that determine demand
• From the law of demand which states that “other things equal, the quantity
demanded of a good falls when the price of the good rises” we can find other
factors that determine demand apart from price
• Factors of demand:
1. Price of a related goods (substitutes vs compliments goods)
2. Income (normal goods vs inferior goods)
3. Tastes or preference
4. Expectations

34. Demand Schedule
• Demand schedule: a table that shows the relationship between the price of a
good and the quantity demanded

35. Demand Curve
• Demand Curve: this is the graphical representation of demand schedule,
shows how the quantity demanded of the good changes as its price varies.
Because a lower price increases the quantity demanded, the demand curve
slopes downward.

36. Shift in the demand curve
• Suppose that the Tanzania Medical Association suddenly announces a new
discovery: People who regularly eat ice cream live longer, healthier lives. How
does this announcement affect the market for ice cream?
• The discovery changes people’s tastes and raises the demand for ice cream.
At any given price, buyers now want to purchase a larger quantity of ice
cream, and the demand curve for ice cream shifts to the right.
• Whenever any determinant of demand changes, other than the good’s price,
any change that increases the quantity demanded at every price shifts the
demand curve to the right (outward shift).
• Similarly, any change that reduces the quantity demanded at every price shifts
the demand curve to the left (inward shift).

37. Shift in the Demand Curve

38. Change in Demand curve
• This is represented by a change in price of a good which results into a
change in quantity demanded assuming other factors are constant.
• There will be a movement along the same demand curve due to either price
increase or price decrease

39. Substitutes and compliments goods
• Compliments goods; A good or service that is used in conjunction with another
good or service.
• Usually, the complementary good has little to no value when consumed alone but,
when combined with another good or service, it adds to the overall value of the
offering.
• Also, good tends to have more value when paired with a complement than it does
by itself, example car and petrol, left shoe and right shoe
• Substitutes goods: A "substitute" or "substitute good" in economics and
consumer theory is a product or service that a consumer sees as the same or similar
to another product, example Pepsi and Coca-Cola, butter and margarine

40. Inferior and Normal Goods
• Inferior goods; these are goods whose its demand decrease as the income of
the consumer increases, example sardines to poor people
• Normal goods; these are goods where by Higher income raises quantity
demanded, also quantity demanded and income move in the same direction.
Example; clothes etc.

41. Elasticity of Demand
• By definition elasticity is the measure of degree of responsiveness
• Elasticity: a measure of the responsiveness of quantity demanded or
quantity supplied to one of its determinants.
• Price elasticity of demand: a measure of how much the quantity
demanded of a good responds to a change in the price of that good,
computed as the percentage change in quantity demanded divided by the
percentage change in price.
• What determines whether the demand for a good is elastic or inelastic?

42. Elasticity of Demand cont. …
• Elastic demand: goods have elastic demand when a small % change in price
will bring about a greater % change in quantity demanded (e>1).
• Inelastic demand; goods have inelastic demand when a greater % change in
price will bring about a small % change in quantity demanded (e<1).
• Unit elastic demand; this is when a percent change in price is the same as
percent change in quantity demanded (e=1).
• Perfect inelastic; this is when quantity demanded does not change but prices
do (e=0)
• Perfect elastic; this is when quantity demanded do change but prices do not
change (e=infinity)

43. Determinants of PeD elasticity of demand
• Necessities versus Luxuries: Necessities tend to have inelastic demands,
whereas luxuries have elastic demands.
• When the price of a visit to the doctor rises, people will not dramatically
alter the number of times they go to the doctor, although they might go
somewhat less often.
• By contrast, when the price of sail boats rises, the quantity of sailboats
demanded falls substantially. The reason is that most people view doctor
visits as a necessity and sailboats as a luxury. Of course, whether a good is a
necessity or a luxury depends not on the intrinsic properties of the good but
on the preferences of the

44. Determinants of PeD elasticity of demand
cont. …
• Availability of Close Substitutes Goods: with close substitutes tend to
have more elastic demand because it is easier for consumers to switch from
that good to others.
• For example, butter and margarine are easily substitutable. A small increase
in the price of butter, assuming the price of margarine is held fixed, causes
the quantity of butter sold to fall by a large amount.
• By contrast, because eggs are a food without a close substitute, the demand
for eggs is probably less elastic than the demand for butter

45. Determinants of PeD elasticity of demand
cont. …
• Time Horizon: Goods tend to have more elastic demand over longer time
horizons. When the price of gasoline rises, the quantity of gasoline
demanded falls only slightly in the first few months.
• Over time, however, people buy more fuel efficient cars, switch to public
transportation, and move closer to where they work. Within several years, the
quantity of gasoline demanded falls substantially.

46. Determinants of PeD elasticity of demand
cont. …
• Definition of the Market: The elasticity of demand in any market depends
on how we draw the boundaries of the market. Narrowly defined markets
tend to have more elastic demand than broadly defined markets, because it is
easier to find close substitutes for narrowly defined goods.
• For example, food, a broad category, has a fairly inelastic demand because
there are no good substitutes for food. Ice cream, a more narrow category,
has a more elastic demand because it is easy to substitute other desserts for
ice cream. Vanilla ice cream, a very narrow category, has a very elastic
demand because other flavors of ice cream are almost perfect substitutes for
vanilla

47. Computing The Price Elasticity Of
Demand
• Economists compute price elasticity of demand as the percentage change in
quantity demanded divide by percentage change in Price
• PeD= % change in QD/% change in P
• For example, suppose that a 10-percent increase in the price of an ice-cream
cone causes the amount of ice cream you buy to fall by 20 percent. Calculate
elasticity of demand?

48. The Midpoint Method
• If you try calculating the price elasticity of demand between two points on a
demand curve, you will quickly notice an annoying problem: The elasticity
from point A to point B seems different from the elasticity from point B to
point A. For example, consider these numbers:
Point A: Price = $4 Quantity = 120
Point B: Price = $6 Quantity = 80
• Price elasticity of demand = [(Q2 - Q1)/[(Q2 + Q1)/2]/(P2 - P1)/[(P2 +
P1)/2]

49. Other Elasticity Of Demand
• income elasticity of demand: a measure of how much the quantity
demanded of a good responds to a change in consumers’ income, computed
as the percentage change in quantity demanded divided by the percentage
change in income.
• i.e. income elasticity of demand = (% change in quantity demanded)/(%
change in income)
• Example: most goods are normal goods: Higher income raises quantity
demanded. Because quantity demanded and income move in the same
direction, normal goods have positive income elasticity

50. Other Elasticity Of Demand cont. …
• A few goods, such as sardine, are inferior goods to poor people: Higher income
lowers the quantity demanded. Because quantity demanded and income
move in opposite directions, inferior goods have negative income elasticity.
• cross-price elasticity of demand a measure of how much the quantity
demanded of one good responds to a change in the price of another good,
computed as the percentage change in quantity demanded of the first good
divided by the percentage change in the price of the second good.
• CPeD= (% change in Quantity of good 1)/(% change in Price of good 2)
• Question: Determine the nature of CPeD of substitute good and
complimentary goods

51. Illustrations
• Whether the cross-price elasticity is a positive or negative number depends
on whether the two goods are substitutes or complements.
• An increase in Hydro electricity prices induces people to grill solar energy
electricity instead. Because the price of hydro electricity and the quantity of
solar energy electricity demanded move in the same direction, the cross-price
elasticity is positive.
• Conversely, complements are goods that are typically used together, such as
computers and software. In this case, the cross-price elasticity is negative,
indicating that an increase in the price of computers reduces the quantity of
software demanded.

52. Supply
• Supply: the quantity of goods that supplier is willing and able to produce
and sell.
• More precisely, we relate the quantity supplied of a commodity to its market
price, holding other things to be equal, such as the cost of production, the
price of substitute goods and the organization of the market.
• The supply schedule of a commodity refers to the relationship between its
market price and the amount of that commodity that producers are willing to
produce and sell.
• The supply curve slopes upward and to the right, rising from southwest to
northeast.

53. Supply cont. …
• law of supply: state that, other things equal, the quantity supplied of a good
rises when the price of the good rises.
• Factors that determines supply
1. Price of a good
2. Inputs prices
3. Technology
4. Expectations

54. Supply schedule and Supply curve
• supply schedule: a table that shows the relationship between the price of a
good and the quantity supplied.
• supply curve: a graph of the relationship between the price of a good and
the quantity supplied.

55. Supply Curve
• Supply curve:

56. Shifts in the supply curve
• Suppose that the price of sugar falls. How does this change affect the supply of ice
cream?
• Because sugar is an input into producing ice cream, the fall in the price of sugar
makes selling ice cream more profitable. This raises the supply of ice cream:
• At any given price, sellers are now willing to produce a larger quantity. Thus, the
supply curve for ice cream shifts to the right.
• Whenever there is a change in any determinant of supply, other than the good’s
price, the supply curve shifts. Any change that raises quantity supplied at every price
shifts the supply curve to the right. Similarly, any change that reduces the quantity
supplied at every price shifts the supply curve to the left.

57. Shift in supply curve
• Graphical presentation

58. Equilibrium Analysis
Equilibrium Analysis
• Equilibrium: a situation in which
supply and demand have been
brought into balance.
• equilibrium price: the price that
balances supply and demand.
• equilibrium quantity: the quantity
supplied and the quantity demanded
when the price has adjusted to
balance supply and demand.
• Graph

59. Surplus and shortage
• Surplus: a situation in which quantity supplied is greater than quantity
demanded, this happen when price is above the equilibrium price(clearing
price).
• Shortage: a situation in which quantity demanded is greater than quantity
supplied, this happen when price is below the equilibrium price.
• law of supply and demand: the claim that the price of any good adjusts to
bring the supply and demand for that good into balance

60. Graphical presentation
• Excess supply • Excess Demand

61. Endogenous and exogenous Variables
• Exogenous variables are considered to emanate from outside the market in
question.
• They include all those influences such as consumers’ preferences, incomes,
technological change, the cost of inputs, climate etc.
• Endogenous variables are those which lie within the market system. There
are three of them: the price of a good, the quantity of the good supplied,
and the quantity demanded.

62. Comparative Static analysis
• This involves comparing two market equilibria before and after change.

63. Illustrations
• In each case, the worst mistake would be to say that a change in the good’s
own price caused the shift in equilibrium.
• In moving from A to B, increasing price reduces quantity demanded along
the demand curve.
• However, the new equilibrium was caused by the shift in the supply curve.
Note that:
1. A shift in the supply curve leads to a movement along the demand curve to
a new static equilibrium position (e.g. at B). This could be caused, for
example, by an increase in the costs of production, or for one season by
bad weather for an agricultural crop.

64. Illustrations
• A shift in the demand curve leads to a movement along the supply curve to a
new static equilibrium position (at D).
• This could result from by an increase in consumer incomes, a change in
preferences in favor of the good, a decrease in the price of a complementary
good, or an increase in the price of a substitute.

65. Other economic concepts
• Pareto Optimality; An economy is in a Pareto Optimal state when no
further changes in the economy can make one person better off without at
the same time making another worse off.
• Concept developed by Vilfredo Pareto
• An economy will be Pareto optimal when operate under perfect competitive
and in a state of static equilibrium.
• Exchange efficiency; occurs when, for any given bundle of goods, it is not
possible to redistribute them such that the utility (welfare) of one consumer
is raised without reducing the utility (welfare) of another consumer.

66. Example
• A simple example of this is where there are two individuals, one with a loaf
of bread, the other with a block of cheese.
• Both can be made better off by exchanging bread for cheese. An efficient
exchange system will allow exchange of bread and cheese to take place until
neither party can be made better off without one of them becoming worse
off.
• Production efficiency: This occurs when the available factors of
production are allocated between products in such a way that it is not
possible to reallocate the production factors so as to raise the output of one
product without reducing the output of another product.

67. Economic Concepts cont. …
• Output efficiency; occurs where the combination of products actually
produced is such that there is no alternative combination of products that
would raise the welfare of one consumer without reducing the welfare of
another.
• Both the exchange efficiency and the production efficiency criteria must hold
in order for this criterion to be met.

68. <<<<END>>>>