MB MC
Chapter 7,Efficiency and Exchange Slide 1
Lecture 18 (2005.11.17)
Class today
p167-179
MB MC
Efficiency and
Exchange
MB MC
Chapter 7,Efficiency and Exchange Slide 3
Overview
Chapter 7 develops the concept of
efficiency and explores why many
tasks are best left up to the market,
It presents the concept of economic
surplus in detail and looks at how
unregulated markets can generate the
largest possible economic surplus,
MB MC
Chapter 7,Efficiency and Exchange Slide 4
Overview
The chapter also discusses why
intervention in the market can lead to
undesired or unintended consequences;
however,social justice is distinguished
from efficiency,
Finally,the chapter discusses how
intervention in a market can lead to
increased economic surplus.
MB MC
Chapter 7,Efficiency and Exchange Slide 5
Producer surplus
Consumer surplus
D
S
Review concepts
Quantity)
Pr
ice
Economic surplus
Equilibrium Price
Equilibrium quantity
MB MC
Chapter 7,Efficiency and Exchange Slide 6
Market Equilibrium and Efficiency
(Poreto) Efficient
A situation is efficient if no change
is possible that will help some
people without harming others.
What do you think?
Are markets always efficient and equitable?
MB MC
Chapter 7,Efficiency and Exchange Slide 7
Market Equilibrium and Efficiency
A market equilibrium is efficient
If price and quantity take any other than
their equilibrium values,a transaction that
will make at least some people better off
without harming others can always be
found.
MB MC
Chapter 7,Efficiency and Exchange Slide 8
A Market in Which Price Is
Below the Equilibrium Level
2.50
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1 2 3 4 5
2.00
1.50
1.00
.50
D
S
MB MC
Chapter 7,Efficiency and Exchange Slide 9
How Excess Demand Creates an Opportunity
for a Surplus-Enhancing Transaction
2.50
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
D
S
1 2 3 4 5
2.00
1.50
1.00
.50
1.25
If P = $1 then QS = 2,000
gallons/day
At 2,000 gallons the consumer is
willing to pay $2 and the MC = $1
If the buyer pays $1.25 for an
extra gallon,producer is $.25
better off,and the consumer is
$.75 better off,or economic
surplus increases by $1.00
At $1,the market is not efficient
MB MC
Chapter 7,Efficiency and Exchange Slide 10
How Excess Supply Creates an Opportunity
for a Surplus-Enhancing Transaction
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
D
S
1 2 3 4 5
2.50
2.00
1.50
1.00
.50
1.75
If P = $2 then QD = 2,000
gallons/day
Additional output costs only $1
This is $1 less than a buyer would
pay
If the buyer pays the seller $1.75,
the buyer gains an economic
surplus of $0.25 then the seller
gains an economic surplus of
$0.75
MB MC
Chapter 7,Efficiency and Exchange Slide 11
Market Equilibrium and Efficiency
Observations on Efficiency
When price is above or below the
equilibrium,the quantity exchanged will be
below the equilibrium.
The vertical value on the demand curve
(marginal benefit) is greater than the
vertical value on the supply curve (MC).
MB MC
Chapter 7,Efficiency and Exchange Slide 12
Market Equilibrium and Efficiency
Markets will be efficient when
Buyers and sellers are well informed.
Markets are perfectly competitive.
Supply measures all relevant costs.
Demand measures all relevant benefits.
MB MC
Chapter 7,Efficiency and Exchange Slide 13
Market Equilibrium and Efficiency
What do you think?
Is efficiency the only goal?
Why should efficiency be the first
goal?
MB MC
Chapter 7,Efficiency and Exchange Slide 14
The Cost of Preventing
Price Adjustments
Price Ceilings
______Do They Help the Poor?
An Example-----7.1
A Price Ceiling for Home Heating Oil
MB MC
Chapter 7,Efficiency and Exchange Slide 15
Producer surplus
= $900/day
Consumer surplus
= $900/day
D
S
Economic Surplus in an Unregulated
Market for Home Heating Oil
2.00
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1 2 3 4 5
1.60
1.20
1.00
.80
1.80
1.40
8
Without price controls:
Equilibrium Price = $1.40
Consumer surplus =
(1/2)(3,000)(.60) = $900/day
Producer surplus =
(1/2)(3,000)(.6) = 900/day
Economic surplus= $1,800/day
MB MC
Chapter 7,Efficiency and Exchange Slide 16
Producer surplus =
$100/day
Lost economic
surplus = $800/day
Consumer surplus =
$900/day
The Waste Caused by Price Controls
2.00
Quantity (1,000s of gallons/day)
D
S
1 2 3 4 5
1.60
1.20
1.00
.80
1.80
1.40
8
Pr
ice
($
/g
all
on
)
With price controls:
Producer surplus =
(1/2)(1,000)(.20) = $100/day or a
loss of $800/day
Economic surplus = $1,000 or a
loss of $800/day
Price Ceiling set at $1.00
MB MC
Chapter 7,Efficiency and Exchange Slide 17
The Cost of Preventing
Price Adjustments
The reduction in economic surplus from
a price ceiling will be underestimated
when
The consumers who receive the product
are not the consumers who value it the
most.
Consumers take costly actions to enhance
their chances of being served.
MB MC
Chapter 7,Efficiency and Exchange Slide 18
The Cost of Preventing
Price Adjustments
Question
What program could be used to help the
poor get heating oil that would be more
efficient than a price ceiling?
MB MC
Chapter 7,Efficiency and Exchange Slide 19
When the Pie Is Larger,
Everyone Can Have a Bigger Slice
R
P
R
P
Surplus with price controls Surplus with income transfers
and no price controls
With price controls set at $1.00 the
economic surplus is $1,000/day
*R = economic surplus received by
rich people
*P = economic surplus received by
poor people
Without price controls & with income
transfers economic surplus is $1,800/day
*R & P have the same share and a
much larger economic surplus
MB MC
Chapter 7,Efficiency and Exchange Slide 20
The Cost of Preventing
Price Adjustments
Question
What would be a potential cost of income
transfers?
MB MC
Chapter 7,Efficiency and Exchange Slide 21
The Cost of Preventing
Price Adjustments
Price Subsidies
______Do They Help the Poor?
Example 7.2_______ By how much do
subsidies reduce total economic surplus in
the market for bread?
Assume a small nation imports all its bread
at the world price of $2.00
MB MC
Chapter 7,Efficiency and Exchange Slide 22
Consumer surplus
= $4,000,000/month
Economic surplus
maximized where
MC($2) = MB($2) at
4 million loaves
Economic Surplus in a
Bread Market Without Subsidy
Quantity (millions of loaves/month
Pr
ice
o
f b
re
ad
($
/lo
af)
2 4 6
3.00
1.00
5.00
4.00
8
D
S2.00World price = $
MB MC
Chapter 7,Efficiency and Exchange Slide 23
Assume a $1/loaf subsidy
Consumers buy 6 million loaves
Consumer surplus will increase to $9
million
Economic surplus will fall by $1 million
The Reduction in Economic
Surplus from a Subsidy
MB MC
Chapter 7,Efficiency and Exchange Slide 24
Consumer surplus
= $9,000/month
Reduction in total
economic surplus =
$1,000,000/month
The Reduction in Economic
Surplus from a Subsidy
Quantity (millions of loaves/month
Pr
ice
o
f b
re
ad
($
/lo
af)
2 4 6
3.00
1.00
5.00
4.00
8
2.00World price = $
D
S
The cost of the tax = $6 million
The benefit of the subsidy = $5 million
Loss of economic surplus = $1 million
MB MC
Chapter 7,Efficiency and Exchange Slide 25
The Cost of Preventing
Price Adjustments
Price Subsidies
How could we provide assistance to low
income consumers more efficiently?
MB MC
Chapter 7,Efficiency and Exchange Slide 26
The Cost of Preventing
Price Adjustments
Economic Naturalist
First-Come,First-Served Policies
Why does no one complain any longer about
being bumped from an overbooked flight?
MB MC
Chapter 7,Efficiency and Exchange Slide 27
Equilibrium in the Market
for Seats on Oversold Flights
Demand for remaining
on the flight
60
24
37
Seats
Pr
ice
($
/se
at)
33
Supply of seats
MB MC
Chapter 7,Efficiency and Exchange Slide 28
Equilibrium in the Market
for Seats on Oversold Flights
60
2427
33 37
Seats
Pr
ice
($
/se
at)
Supply of seats
First-come,First-served
Reservation prices =
(60+59+…+24)/37 = $42/passenger
4 bumped @ $42 each or $168
loss in economic surplus
MB MC
Chapter 7,Efficiency and Exchange Slide 29
Equilibrium in the Market
for Seats on Oversold Flights
60
2427
33 37
Seats
Pr
ice
($
/se
at)
Supply of seats
Compensation Policy
$27 = reservation price (compensation) to get
4 passengers to volunteer to stay
The cost of the compensation = 4 x $27 = $108
minus the economic surplus to the passengers
of $6 = $102
MB MC
Chapter 7,Efficiency and Exchange Slide 30
Homework
P188,RQ 1; 4
P188,PROBLEMS 1;2
Preview,p179— 188
MB MC
Chapter 7,Efficiency and Exchange Slide 31
Lecture 19(2005.11.22)
Class today:
p179— 188
Review question 2
Problem 3
MB MC
Chapter 7,Efficiency and Exchange Slide 32
The Cost of Preventing Price Adjustments
Example 7.3
How should a tennis pro handle an
overbooking problem?
MB MC
Chapter 7,Efficiency and Exchange Slide 33
Player
Ann 9:50 A.M,$4
Bill 9:52 A.M,3
Carrie 9:55 A.M,6
Dana 9:56 A.M,10
Earl 9:59 A.M,3
Arrival time Reservation price
5 bookings for 3 slots
All 5 show up for the lesson
How can the tennis pro minimize the cost of
rescheduling two students?
HINT,First-come,First-served or compensation
The Cost of Preventing Price Adjustments
MB MC
Chapter 7,Efficiency and Exchange Slide 34
The Cost of Preventing
Price Adjustments
What do you think?
Why offer compensation when the cost of
first-come,first-served to the seller is zero?
MB MC
Chapter 7,Efficiency and Exchange Slide 35
The Cost of Preventing
Price Adjustments
P189
____Problem 3
MB MC
Chapter 7,Efficiency and Exchange Slide 36
The Marginal Cost Pricing of
Public Services
Example 7.4
How much should a city charge for water,
electricity,or some other service?
MB MC
Chapter 7,Efficiency and Exchange Slide 37
The Marginal Cost Curve for Water
Water supplied (millions of gallons/day)
Co
st
(c
en
ts
/g
all
on
)
4.0
0.8
0.2
1 3
Spring
Lake
Ocean
Three sources of water
Spring,1 million
gallons/day,02 cents/gallon
Lake,2 million gallons/day
@,08 cents/gallon
Ocean,4 cents/gallon
MB MC
Chapter 7,Efficiency and Exchange Slide 38
The Marginal Cost Curve for Water
Example 7.5
How much should a city charge for water?
MB MC
Chapter 7,Efficiency and Exchange Slide 39
The Marginal Cost Curve for Water
Water supplied (millions of gallons/day)
Co
st
(c
en
ts
/g
all
on
)
4.0
0.8
0.2
1 3
Spring
Lake
Ocean
Assume
If P = 4 cents/gallon,Q = 4
million gallons
Question
Why should all residents
pay 4 cents per gallon
MB MC
Chapter 7,Efficiency and Exchange Slide 40
Taxes and Efficiency
Question
Who Pays A Tax Imposed On Sellers of a
Good?
MB MC
Chapter 7,Efficiency and Exchange Slide 41
The Effect of a Tax on the
Equilibrium Quantity and Price of Potatoes
6
Quantity (millions of pounds/month)
Pr
ice
($
/p
ou
nd
)
1 2 3 4 5
5
4
2
1
D
S
3
Without a tax P = $3/lb
and Q = 3 million lbs/month
2.50
3.50
S + tax
2.5
With a tax of $1/lb
MC increases by $1/lb
Supply shifts up by $1
P = $3.50; Q = 2.5 million
Consumers and producers share
the burden of the tax equally
Producers receive $2.50/lb
Consumers pay $3.50/lb
MB MC
Chapter 7,Efficiency and Exchange Slide 42
Taxes and Efficiency
Question
How will a tax on cars affect their prices in
the long run?
MB MC
Chapter 7,Efficiency and Exchange Slide 43
The Effect of a Tax on Sellers of a
Good with Infinite Price Elasticity of Supply
Quantity (millions of cars/month)
Pr
ice
($
/ca
r)
D
S
2.0
$20,000
Assume a tax levy of $100 tax/car
1.9
S + $100$20,100
Supply shifts to $20,100
The burden of the tax falls
entirely on the consumer
MB MC
Chapter 7,Efficiency and Exchange Slide 44
Taxes and Efficiency
Who Pays a Tax?
When supply is perfectly elastic,the tax
burden will fall entirely on the consumer.
MB MC
Chapter 7,Efficiency and Exchange Slide 45
Total economic
surplus = $9
million/month
How a tax collected for
a seller affects
economic surplus
The Market for Potatoes Without Taxes
6
1 2 3 4 5
5
4
2
1
3
Pr
ice
($
/p
ou
nd
)
Quantity (millions of pounds/month)
D
S
MB MC
Chapter 7,Efficiency and Exchange Slide 46
The Effect of a $1 per
Pound Tax on Potatoes
6
Quantity (millions of pounds/month)
Pr
ice
($
/p
ou
nd
)
1 2 3 4 5
5
4
2
1
3
2.50
3.50
S + tax
2.5
D
S
How a tax collected
from a seller affects
economic surplus
MB MC
Chapter 7,Efficiency and Exchange Slide 47
Taxes and Efficiency
Deadweight Loss
The reduction in total economic surplus
that results from the adoption of a policy
MB MC
Chapter 7,Efficiency and Exchange Slide 48
The Deadweight Loss Caused by a Tax
6
Quantity (millions of pounds/month)
Pr
ice
($
/p
ou
nd
)
D
S
1 2 3 4 5
5
4
2
1
3
2.50
3.50
S + tax
2.5
Deadweight loss
caused by tax
MB MC
Chapter 7,Efficiency and Exchange Slide 49
Taxes and Efficiency
Question
How would you determine the economic
feasibility of a tax?
MB MC
Chapter 7,Efficiency and Exchange Slide 50
Lecture 20 (2005.11.24)
Class today:
* p186-187
* supplements
* exercise 4 ;
answers to
problem 3 (d)
* choices
MB MC
Chapter 7,Efficiency and Exchange Slide 51
Review concepts
Efficiency (economic efficiency)
-----(p82) occurs when all goods and services
are produced and consumed at their
respective socially optimal levels.
------(Paul A.Samuelson) Absence of waster,
or the use of economic resources that
produces the maximum level of satisfaction
possible with the given inputs and technology,
(给定投入和技术条件下，经济资源没有浪费，或对经济资源做了能带来最大可能的满足程度的利用）
MB MC
Chapter 7,Efficiency and Exchange Slide 52
Pareto efficiency (Pareto optimal )
--------- efficiency criterion
-------多数经济学家认为，社会应当寻求那些不伤害任何人而能改善一些人境遇的变化。
Pareto Efficient
------A situation is efficient if no change is
possible that will help some people without
harming others.（ 当无法找到一笔能帮助一些人而不伤害其他人的交易时，该情形有效）
-------Pareto improvement (帕雷托改进 )
MB MC
Chapter 7,Efficiency and Exchange Slide 53
Review (Taxes and Efficiency)
Deadweight Loss
The reduction in total economic surplus
that results from the adoption of a policy
MB MC
Chapter 7,Efficiency and Exchange Slide 54
Taxes and Efficiency
Question
How would you determine the economic
feasibility of a tax?
MB MC
Chapter 7,Efficiency and Exchange Slide 55
Elasticity of Demand and
the Deadweight Loss from a Tax
Quantity (units/day)
Pr
ice
($
/u
nit)
21
2.60
1.60
S + T
19
2.40
1.40
S + T
Deadweight loss ($2.5) Deadweight loss ($1.5)
Quantity (units/day)
Pr
ice
($
/u
nit)
D1
S
24
2.00
D2
S
24
2.00
The greater the elasticity of demand,the
greater the deadweight loss from a tax
MB MC
Chapter 7,Efficiency and Exchange Slide 56
57
2.65
1.65
S1 + T
63
2.35
1.35
S2 + T
Deadweight Loss ($7.5) Deadweight Loss ($4.5)
Elasticity of Supply and the
Deadweight Loss from a Tax
Pr
ice
($
/u
nit)
Pr
ice
($
/u
nit)
D
S1
72
2.00
D
S2
72
2.00
The greater the elasticity of supply,the
greater the deadweight loss from a tax
Quantity (units/day) Quantity (units/day)
MB MC
Chapter 7,Efficiency and Exchange Slide 57
Taxes and Efficiency
What do you think?
Why would a tax on land be efficient?
Would a tax on pollution increase
economic surplus?
MB MC
End of
Chapter
MB MC
Chapter 7,Efficiency and Exchange Slide 59
Homework
P189,4
Preview chapter 8 (p193-204)
Chapter 7,Efficiency and Exchange Slide 1
Lecture 18 (2005.11.17)
Class today
p167-179
MB MC
Efficiency and
Exchange
MB MC
Chapter 7,Efficiency and Exchange Slide 3
Overview
Chapter 7 develops the concept of
efficiency and explores why many
tasks are best left up to the market,
It presents the concept of economic
surplus in detail and looks at how
unregulated markets can generate the
largest possible economic surplus,
MB MC
Chapter 7,Efficiency and Exchange Slide 4
Overview
The chapter also discusses why
intervention in the market can lead to
undesired or unintended consequences;
however,social justice is distinguished
from efficiency,
Finally,the chapter discusses how
intervention in a market can lead to
increased economic surplus.
MB MC
Chapter 7,Efficiency and Exchange Slide 5
Producer surplus
Consumer surplus
D
S
Review concepts
Quantity)
Pr
ice
Economic surplus
Equilibrium Price
Equilibrium quantity
MB MC
Chapter 7,Efficiency and Exchange Slide 6
Market Equilibrium and Efficiency
(Poreto) Efficient
A situation is efficient if no change
is possible that will help some
people without harming others.
What do you think?
Are markets always efficient and equitable?
MB MC
Chapter 7,Efficiency and Exchange Slide 7
Market Equilibrium and Efficiency
A market equilibrium is efficient
If price and quantity take any other than
their equilibrium values,a transaction that
will make at least some people better off
without harming others can always be
found.
MB MC
Chapter 7,Efficiency and Exchange Slide 8
A Market in Which Price Is
Below the Equilibrium Level
2.50
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1 2 3 4 5
2.00
1.50
1.00
.50
D
S
MB MC
Chapter 7,Efficiency and Exchange Slide 9
How Excess Demand Creates an Opportunity
for a Surplus-Enhancing Transaction
2.50
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
D
S
1 2 3 4 5
2.00
1.50
1.00
.50
1.25
If P = $1 then QS = 2,000
gallons/day
At 2,000 gallons the consumer is
willing to pay $2 and the MC = $1
If the buyer pays $1.25 for an
extra gallon,producer is $.25
better off,and the consumer is
$.75 better off,or economic
surplus increases by $1.00
At $1,the market is not efficient
MB MC
Chapter 7,Efficiency and Exchange Slide 10
How Excess Supply Creates an Opportunity
for a Surplus-Enhancing Transaction
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
D
S
1 2 3 4 5
2.50
2.00
1.50
1.00
.50
1.75
If P = $2 then QD = 2,000
gallons/day
Additional output costs only $1
This is $1 less than a buyer would
pay
If the buyer pays the seller $1.75,
the buyer gains an economic
surplus of $0.25 then the seller
gains an economic surplus of
$0.75
MB MC
Chapter 7,Efficiency and Exchange Slide 11
Market Equilibrium and Efficiency
Observations on Efficiency
When price is above or below the
equilibrium,the quantity exchanged will be
below the equilibrium.
The vertical value on the demand curve
(marginal benefit) is greater than the
vertical value on the supply curve (MC).
MB MC
Chapter 7,Efficiency and Exchange Slide 12
Market Equilibrium and Efficiency
Markets will be efficient when
Buyers and sellers are well informed.
Markets are perfectly competitive.
Supply measures all relevant costs.
Demand measures all relevant benefits.
MB MC
Chapter 7,Efficiency and Exchange Slide 13
Market Equilibrium and Efficiency
What do you think?
Is efficiency the only goal?
Why should efficiency be the first
goal?
MB MC
Chapter 7,Efficiency and Exchange Slide 14
The Cost of Preventing
Price Adjustments
Price Ceilings
______Do They Help the Poor?
An Example-----7.1
A Price Ceiling for Home Heating Oil
MB MC
Chapter 7,Efficiency and Exchange Slide 15
Producer surplus
= $900/day
Consumer surplus
= $900/day
D
S
Economic Surplus in an Unregulated
Market for Home Heating Oil
2.00
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1 2 3 4 5
1.60
1.20
1.00
.80
1.80
1.40
8
Without price controls:
Equilibrium Price = $1.40
Consumer surplus =
(1/2)(3,000)(.60) = $900/day
Producer surplus =
(1/2)(3,000)(.6) = 900/day
Economic surplus= $1,800/day
MB MC
Chapter 7,Efficiency and Exchange Slide 16
Producer surplus =
$100/day
Lost economic
surplus = $800/day
Consumer surplus =
$900/day
The Waste Caused by Price Controls
2.00
Quantity (1,000s of gallons/day)
D
S
1 2 3 4 5
1.60
1.20
1.00
.80
1.80
1.40
8
Pr
ice
($
/g
all
on
)
With price controls:
Producer surplus =
(1/2)(1,000)(.20) = $100/day or a
loss of $800/day
Economic surplus = $1,000 or a
loss of $800/day
Price Ceiling set at $1.00
MB MC
Chapter 7,Efficiency and Exchange Slide 17
The Cost of Preventing
Price Adjustments
The reduction in economic surplus from
a price ceiling will be underestimated
when
The consumers who receive the product
are not the consumers who value it the
most.
Consumers take costly actions to enhance
their chances of being served.
MB MC
Chapter 7,Efficiency and Exchange Slide 18
The Cost of Preventing
Price Adjustments
Question
What program could be used to help the
poor get heating oil that would be more
efficient than a price ceiling?
MB MC
Chapter 7,Efficiency and Exchange Slide 19
When the Pie Is Larger,
Everyone Can Have a Bigger Slice
R
P
R
P
Surplus with price controls Surplus with income transfers
and no price controls
With price controls set at $1.00 the
economic surplus is $1,000/day
*R = economic surplus received by
rich people
*P = economic surplus received by
poor people
Without price controls & with income
transfers economic surplus is $1,800/day
*R & P have the same share and a
much larger economic surplus
MB MC
Chapter 7,Efficiency and Exchange Slide 20
The Cost of Preventing
Price Adjustments
Question
What would be a potential cost of income
transfers?
MB MC
Chapter 7,Efficiency and Exchange Slide 21
The Cost of Preventing
Price Adjustments
Price Subsidies
______Do They Help the Poor?
Example 7.2_______ By how much do
subsidies reduce total economic surplus in
the market for bread?
Assume a small nation imports all its bread
at the world price of $2.00
MB MC
Chapter 7,Efficiency and Exchange Slide 22
Consumer surplus
= $4,000,000/month
Economic surplus
maximized where
MC($2) = MB($2) at
4 million loaves
Economic Surplus in a
Bread Market Without Subsidy
Quantity (millions of loaves/month
Pr
ice
o
f b
re
ad
($
/lo
af)
2 4 6
3.00
1.00
5.00
4.00
8
D
S2.00World price = $
MB MC
Chapter 7,Efficiency and Exchange Slide 23
Assume a $1/loaf subsidy
Consumers buy 6 million loaves
Consumer surplus will increase to $9
million
Economic surplus will fall by $1 million
The Reduction in Economic
Surplus from a Subsidy
MB MC
Chapter 7,Efficiency and Exchange Slide 24
Consumer surplus
= $9,000/month
Reduction in total
economic surplus =
$1,000,000/month
The Reduction in Economic
Surplus from a Subsidy
Quantity (millions of loaves/month
Pr
ice
o
f b
re
ad
($
/lo
af)
2 4 6
3.00
1.00
5.00
4.00
8
2.00World price = $
D
S
The cost of the tax = $6 million
The benefit of the subsidy = $5 million
Loss of economic surplus = $1 million
MB MC
Chapter 7,Efficiency and Exchange Slide 25
The Cost of Preventing
Price Adjustments
Price Subsidies
How could we provide assistance to low
income consumers more efficiently?
MB MC
Chapter 7,Efficiency and Exchange Slide 26
The Cost of Preventing
Price Adjustments
Economic Naturalist
First-Come,First-Served Policies
Why does no one complain any longer about
being bumped from an overbooked flight?
MB MC
Chapter 7,Efficiency and Exchange Slide 27
Equilibrium in the Market
for Seats on Oversold Flights
Demand for remaining
on the flight
60
24
37
Seats
Pr
ice
($
/se
at)
33
Supply of seats
MB MC
Chapter 7,Efficiency and Exchange Slide 28
Equilibrium in the Market
for Seats on Oversold Flights
60
2427
33 37
Seats
Pr
ice
($
/se
at)
Supply of seats
First-come,First-served
Reservation prices =
(60+59+…+24)/37 = $42/passenger
4 bumped @ $42 each or $168
loss in economic surplus
MB MC
Chapter 7,Efficiency and Exchange Slide 29
Equilibrium in the Market
for Seats on Oversold Flights
60
2427
33 37
Seats
Pr
ice
($
/se
at)
Supply of seats
Compensation Policy
$27 = reservation price (compensation) to get
4 passengers to volunteer to stay
The cost of the compensation = 4 x $27 = $108
minus the economic surplus to the passengers
of $6 = $102
MB MC
Chapter 7,Efficiency and Exchange Slide 30
Homework
P188,RQ 1; 4
P188,PROBLEMS 1;2
Preview,p179— 188
MB MC
Chapter 7,Efficiency and Exchange Slide 31
Lecture 19(2005.11.22)
Class today:
p179— 188
Review question 2
Problem 3
MB MC
Chapter 7,Efficiency and Exchange Slide 32
The Cost of Preventing Price Adjustments
Example 7.3
How should a tennis pro handle an
overbooking problem?
MB MC
Chapter 7,Efficiency and Exchange Slide 33
Player
Ann 9:50 A.M,$4
Bill 9:52 A.M,3
Carrie 9:55 A.M,6
Dana 9:56 A.M,10
Earl 9:59 A.M,3
Arrival time Reservation price
5 bookings for 3 slots
All 5 show up for the lesson
How can the tennis pro minimize the cost of
rescheduling two students?
HINT,First-come,First-served or compensation
The Cost of Preventing Price Adjustments
MB MC
Chapter 7,Efficiency and Exchange Slide 34
The Cost of Preventing
Price Adjustments
What do you think?
Why offer compensation when the cost of
first-come,first-served to the seller is zero?
MB MC
Chapter 7,Efficiency and Exchange Slide 35
The Cost of Preventing
Price Adjustments
P189
____Problem 3
MB MC
Chapter 7,Efficiency and Exchange Slide 36
The Marginal Cost Pricing of
Public Services
Example 7.4
How much should a city charge for water,
electricity,or some other service?
MB MC
Chapter 7,Efficiency and Exchange Slide 37
The Marginal Cost Curve for Water
Water supplied (millions of gallons/day)
Co
st
(c
en
ts
/g
all
on
)
4.0
0.8
0.2
1 3
Spring
Lake
Ocean
Three sources of water
Spring,1 million
gallons/day,02 cents/gallon
Lake,2 million gallons/day
@,08 cents/gallon
Ocean,4 cents/gallon
MB MC
Chapter 7,Efficiency and Exchange Slide 38
The Marginal Cost Curve for Water
Example 7.5
How much should a city charge for water?
MB MC
Chapter 7,Efficiency and Exchange Slide 39
The Marginal Cost Curve for Water
Water supplied (millions of gallons/day)
Co
st
(c
en
ts
/g
all
on
)
4.0
0.8
0.2
1 3
Spring
Lake
Ocean
Assume
If P = 4 cents/gallon,Q = 4
million gallons
Question
Why should all residents
pay 4 cents per gallon
MB MC
Chapter 7,Efficiency and Exchange Slide 40
Taxes and Efficiency
Question
Who Pays A Tax Imposed On Sellers of a
Good?
MB MC
Chapter 7,Efficiency and Exchange Slide 41
The Effect of a Tax on the
Equilibrium Quantity and Price of Potatoes
6
Quantity (millions of pounds/month)
Pr
ice
($
/p
ou
nd
)
1 2 3 4 5
5
4
2
1
D
S
3
Without a tax P = $3/lb
and Q = 3 million lbs/month
2.50
3.50
S + tax
2.5
With a tax of $1/lb
MC increases by $1/lb
Supply shifts up by $1
P = $3.50; Q = 2.5 million
Consumers and producers share
the burden of the tax equally
Producers receive $2.50/lb
Consumers pay $3.50/lb
MB MC
Chapter 7,Efficiency and Exchange Slide 42
Taxes and Efficiency
Question
How will a tax on cars affect their prices in
the long run?
MB MC
Chapter 7,Efficiency and Exchange Slide 43
The Effect of a Tax on Sellers of a
Good with Infinite Price Elasticity of Supply
Quantity (millions of cars/month)
Pr
ice
($
/ca
r)
D
S
2.0
$20,000
Assume a tax levy of $100 tax/car
1.9
S + $100$20,100
Supply shifts to $20,100
The burden of the tax falls
entirely on the consumer
MB MC
Chapter 7,Efficiency and Exchange Slide 44
Taxes and Efficiency
Who Pays a Tax?
When supply is perfectly elastic,the tax
burden will fall entirely on the consumer.
MB MC
Chapter 7,Efficiency and Exchange Slide 45
Total economic
surplus = $9
million/month
How a tax collected for
a seller affects
economic surplus
The Market for Potatoes Without Taxes
6
1 2 3 4 5
5
4
2
1
3
Pr
ice
($
/p
ou
nd
)
Quantity (millions of pounds/month)
D
S
MB MC
Chapter 7,Efficiency and Exchange Slide 46
The Effect of a $1 per
Pound Tax on Potatoes
6
Quantity (millions of pounds/month)
Pr
ice
($
/p
ou
nd
)
1 2 3 4 5
5
4
2
1
3
2.50
3.50
S + tax
2.5
D
S
How a tax collected
from a seller affects
economic surplus
MB MC
Chapter 7,Efficiency and Exchange Slide 47
Taxes and Efficiency
Deadweight Loss
The reduction in total economic surplus
that results from the adoption of a policy
MB MC
Chapter 7,Efficiency and Exchange Slide 48
The Deadweight Loss Caused by a Tax
6
Quantity (millions of pounds/month)
Pr
ice
($
/p
ou
nd
)
D
S
1 2 3 4 5
5
4
2
1
3
2.50
3.50
S + tax
2.5
Deadweight loss
caused by tax
MB MC
Chapter 7,Efficiency and Exchange Slide 49
Taxes and Efficiency
Question
How would you determine the economic
feasibility of a tax?
MB MC
Chapter 7,Efficiency and Exchange Slide 50
Lecture 20 (2005.11.24)
Class today:
* p186-187
* supplements
* exercise 4 ;
answers to
problem 3 (d)
* choices
MB MC
Chapter 7,Efficiency and Exchange Slide 51
Review concepts
Efficiency (economic efficiency)
-----(p82) occurs when all goods and services
are produced and consumed at their
respective socially optimal levels.
------(Paul A.Samuelson) Absence of waster,
or the use of economic resources that
produces the maximum level of satisfaction
possible with the given inputs and technology,
(给定投入和技术条件下，经济资源没有浪费，或对经济资源做了能带来最大可能的满足程度的利用）
MB MC
Chapter 7,Efficiency and Exchange Slide 52
Pareto efficiency (Pareto optimal )
--------- efficiency criterion
-------多数经济学家认为，社会应当寻求那些不伤害任何人而能改善一些人境遇的变化。
Pareto Efficient
------A situation is efficient if no change is
possible that will help some people without
harming others.（ 当无法找到一笔能帮助一些人而不伤害其他人的交易时，该情形有效）
-------Pareto improvement (帕雷托改进 )
MB MC
Chapter 7,Efficiency and Exchange Slide 53
Review (Taxes and Efficiency)
Deadweight Loss
The reduction in total economic surplus
that results from the adoption of a policy
MB MC
Chapter 7,Efficiency and Exchange Slide 54
Taxes and Efficiency
Question
How would you determine the economic
feasibility of a tax?
MB MC
Chapter 7,Efficiency and Exchange Slide 55
Elasticity of Demand and
the Deadweight Loss from a Tax
Quantity (units/day)
Pr
ice
($
/u
nit)
21
2.60
1.60
S + T
19
2.40
1.40
S + T
Deadweight loss ($2.5) Deadweight loss ($1.5)
Quantity (units/day)
Pr
ice
($
/u
nit)
D1
S
24
2.00
D2
S
24
2.00
The greater the elasticity of demand,the
greater the deadweight loss from a tax
MB MC
Chapter 7,Efficiency and Exchange Slide 56
57
2.65
1.65
S1 + T
63
2.35
1.35
S2 + T
Deadweight Loss ($7.5) Deadweight Loss ($4.5)
Elasticity of Supply and the
Deadweight Loss from a Tax
Pr
ice
($
/u
nit)
Pr
ice
($
/u
nit)
D
S1
72
2.00
D
S2
72
2.00
The greater the elasticity of supply,the
greater the deadweight loss from a tax
Quantity (units/day) Quantity (units/day)
MB MC
Chapter 7,Efficiency and Exchange Slide 57
Taxes and Efficiency
What do you think?
Why would a tax on land be efficient?
Would a tax on pollution increase
economic surplus?
MB MC
End of
Chapter
MB MC
Chapter 7,Efficiency and Exchange Slide 59
Homework
P189,4
Preview chapter 8 (p193-204)
