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Lecture Managerial economics (10/e): Chapter 16 - Christopher R. Thomas, S. Charles Maurice

In this chapter we showed you why economists and policymakers believe well-functioning competitive markets can lead to economically efficient levels of production and consumption in equilibrium. This chapter examined six important reasons for market failure and suggested some ways that government policymakers may remedy these failures. | Chapter 16: Government Regulation of Business McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Market Competition & Social Economic Efficiency Social economic efficiency Exists when the goods & services that society desires are produced & consumed with no waste from inefficiency Two efficiency conditions must be met Productive efficiency Allocative efficiency Productive Efficiency Exists when suppliers produce goods & services at the lowest possible total cost to society Occurs when firms operate along their expansion paths in both the short-run & long-run Allocative Efficiency Requires businesses to supply optimal amounts of all goods & services demanded by society And these units must be rationed to individuals who place the highest value on consuming them Optimal level of output is reached when the MB of another unit to consumers just equals the MC to society of producing another unit Where P = MC (marginal-cost-pricing) Social | Chapter 16: Government Regulation of Business McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Market Competition & Social Economic Efficiency Social economic efficiency Exists when the goods & services that society desires are produced & consumed with no waste from inefficiency Two efficiency conditions must be met Productive efficiency Allocative efficiency Productive Efficiency Exists when suppliers produce goods & services at the lowest possible total cost to society Occurs when firms operate along their expansion paths in both the short-run & long-run Allocative Efficiency Requires businesses to supply optimal amounts of all goods & services demanded by society And these units must be rationed to individuals who place the highest value on consuming them Optimal level of output is reached when the MB of another unit to consumers just equals the MC to society of producing another unit Where P = MC (marginal-cost-pricing) Social Economic Efficiency Achieved by markets in perfectly competitive equilibrium At the intersection of demand & supply, conditions for productive & allocative efficiency are met At the market-clearing price, buyers & sellers engage in voluntary exchange that maximizes social surplus Efficiency in Perfect Competition (Figure 16.1) Market Failure & the Case for Government Intervention Competitive markets can achieve social economic efficiency without government regulation But, not all markets are competitive, and even competitive markets can sometimes fail to achieve maximum social surplus Market failure When a market fails to achieve social economic efficiency and, consequently, fails to maximize social surplus Market Failure & the Case for Government Intervention Six forms of market failure can undermine economic efficiency: Monopoly power Natural monopoly Negative (& positive) externalities Common property resources Public goods Information problems Market Failure & the .