ECON1101 - Efficiency

Efficiency deals with using resources to produce maximal output.

Hallmarks of Efficient Systems

  • No one can be made better off without making someone else worse off.
  • No additional output can be obtained without increasing the amount of inputs.
  • Production proceeds at the lowest possible per-unit cost.
  • No Pareto Improvements can be made

Pareto Improvements

A Pareto Improvement is one which makes one person better off without making anyone else worse off.

Market Equilibrium and Efficiency

The market price will never have a potential Pareto Improvements

Market is defined as efficient when:

  • Buyers and Sellers are well informed
  • Markets are perfectly competitive
  • Supply measures all relative costs
  • Demand measures all relative benefits

Efficiency means lower equity, and greater equity hence means inefficiency.

Price Floors and Ceilings

Deadweight Loss: Best case loss from the marginal price being below the equilibrium (i.e. marginal cost not equaling marginal benefit)

A price floor above/ceiling below market price leads to a loss of:

(1)
\begin{align} \frac {(P_D-P_S)*(E_Q - Q_D)}{2} \end{align}

^for the price at the quantity where the ceiling crosses the Demand Curve.

But also to extra losses if consumers don't receive products based on who most values it, and if they take costly action to guarantee receiving it.

Effect of Taxes

Taxes create deadweight losses, as they reduce the equilibrium quantity.

Incidence of tax is shared between producers and consumers

If supply is more elastic, producers bear a smaller burden (and hence consumers a greater).
If demand is more elastic, consumers bear a smaller burden (and hence producers a greater).

As supply and demand elasticity increases, tax revenue increases and deadweight loss decreases