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Economic Efficiency and the Role of Government. While the first lesson is worth $25 to some consumer (Flo) . . . Price. the second lesson is worth only $23 . . . and the third is worth $21. Number of Lessons per Week. Figure 1 The Marginal Benefit from Guitar Lessons. Flo. $25. Joe. $23.
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Economic Efficiency and the Role of Government
While the first lesson is worth $25 to some consumer (Flo) . . . Price the second lesson is worth only $23 . . . and the third is worth $21. Number of Lessons per Week Figure 1 The Marginal Benefit from Guitar Lessons Flo $25 Joe $23 Flo (again) $21 Bo $19 Zoe $17 Demand 1 2 3 4 5
Price The smallest cost for this first lesson is $13 . . . but it's $15 for the second . . . and $17 for the third. Number of Lessons per Week Figure 2 The Marginal Cost of Guitar Lessons Supply $21 McCollum $19 Martin (again) $17 Gibson $15 Martin (again) $13 Martin 1 2 3 4 5
Price 1. Joe would pay as much as $23 for the second lesson . . . 3. Four lessons is the equilibrium and the efficient quantity. 2. while Martin would offer it for as little as $15. Number of Lessons per Week Figure 3 Efficiency in the Market for Guitar Lessons Flo $25 Supply Joe $23 Flo $21 McCollum $19 Bo Martin $17 Zoe Gibson $15 Martin $13 Demand Martin 1 2 3 4 5
(a) 1. When market price is $19, someone (Flo) gets $6 in consumer surplus on the first lesson . . . 2. someone (Joe) gets $4 in consumer surplus on the second . . . Price 3. and someone (Flo again) gets $2 in consumer surplus on the third. The total shaded area is market consumer surplus. Assumed Market Price Number of Lessons per Week Figure 4 Consumer Surplus in a Small and a Large Market for Guitar Lessons $25 $23 $21 $19 $17 Demand 1 2 3 4 5
(b) Price In a market with many buyers, market consumer surplus is the entire area under the demand curve and above the market price. Number of Lessons per Week Figure 4 Consumer Surplus in a Small and a Large Market for Guitar Lessons $19 Market Price Demand 4,000
1.When market price is $19, someone (Martin) gets $6 in producer surplus on the first lesson . . . (a) Price 2. someone (Martin again) gets $4 in producer surplus on the second . . . 3. and someone (Gibson) gets $2 on the third. Assumed Market Price The total shaded area is market producer surplus. Number of Lessons per Week Figure 5 Producer Surplus from Selling Guitar Lessons Supply $21 $19 $17 $15 $13 1 2 3 4 5
(b) Price In a market with many sellers, market producer surplus is the entire area above the market supply curve and below the market price. Number of Lessons per Week Figure 5 Producer Surplus from Selling Guitar Lessons Supply Market Price $19 4,000
Price Equilibrium Quantity Figure 6 Total Net Benefits in a Competitive Market for Guitar Lessons S Equilibrium Price $19 D 4,000
1. A price ceiling of $15 . . . 2. transfers surplus from producers to consumers. Price 3. It also decreases market quantity, taking away some consumer surplus 4 . . . . and some producer surplus, which are not transferred to anyone. Figure 7 Why Price Ceilings and Price Floors Are Inefficient (a) S $23 C E $19 D B $15 D A 2,000 4,000 6,000
1. A price floor of $21 . . . Price 2. transfers surplus from consumers to producers. 3. It also decreases market quantity, taking away some consumer surplus 4 . . . . and some producer surplus, which are not transferred to anyone. Figure 7 Why Price Ceilings and Price Floors Are Inefficient S C $21 B E $19 D $17 A D 3,000 4,000 5,000
$18,000 14,000 10,000 Average Output per Worker 6,000 2,000 Low Medium High Quality of Infrastructure Figure 8 Government Infrastructure and Output per Worker
1. A monopoly charges a higher price than a competitive market . . . Dollars 3. The result is a welfare loss . . . 4. from not producing the efficient quantity, at point E. 2. and produces a lower quantity. Number of Lessons per Week Figure 9 The Welfare Loss from Monopoly MC $22 E $19 D MR 2,500 4,000
Dollars Unregulated monopoly "Fair rate of return" production Efficient production (requires subsidy) Number of Households Served Figure 10 Regulating a Natural Monopoly A $60 C $29 LRATC F $15 MC B MR D 50,000 100,000 85,000
(a) 1. This market has a negative externality of $0.50 per unit. Dollars 2. The efficient quantity is here . . . 3. but the equilibrium quantity is here. Millions of Gallons per Period 4. In equilibrium, the welfare loss is triangle ABC. Figure 11A Tax on Producers to Correct a Negative Externality MSC C $0.50 B S A $1.00 D 100 125
5. A tax per unit on producers, equal to the negative externality per unit, (b) 6. shifts the supply curve upward . . . Dollars 7. and moves the equilibrium to the efficient quantity. Millions of Gallons per Period Figure 11A Tax on Producers to Correct a Negative Externality SAfter Tax SBefore Tax B $0.50 $1.30 A $1.00 $0.80 D 100 125 (b)
(a) 1.This market has a positive externality of $30,000 per college degree. Dollars 2. The equilibrium quantity is here . . . 3. but the efficient quantity is here. Number of Degrees per Year 4. In equilibrium, the welfare loss is triangle ABC. Figure 12 A Subsidy for Consumers to Correct a Positive Externality S $30,000 B $100,000 A MSB C D 800,000 1,000,000
(b) 5. A subsidy per unit for consumers equal to the positive externality per unit . . . 6. shifts the demand curve upward . . . Dollars 7. and moves the market to the efficient quantity Number of Degrees per Year Figure 12 A Subsidy for Consumers to Correct a Positive Externality S $30,000 B $114,000 $100,000 A DAfter Subsidy $84,000 DBefore Subsidy 800,000 1,000,000
Mixed Good Pure Private Good Mixed Good Pure Public Good Figure 13 Pure Private, Pure Public, and Mixed Goods More Rival More Nonrival More Excludable • software • food, clothing, housing • sold-out movie • movie with empty seats • crowded highway • uncrowded highway • newspaper • downloaded music file • cable television • urban park • police and fire protection • crowded city streets • national defense, legal system • fish in international waters MoreNonexcludable