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Socially Efficient and Inefficient Market Outcomes

The document discusses allocative efficiency, defined as the point where price equals marginal cost, maximizing total economic surplus. It explains deadweight loss, which is the loss of total surplus that occurs when market equilibrium is disrupted by government interference or externalities. Various market scenarios, such as monopolies and taxes, are identified as situations that can lead to deadweight loss.

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25 views14 pages

Socially Efficient and Inefficient Market Outcomes

The document discusses allocative efficiency, defined as the point where price equals marginal cost, maximizing total economic surplus. It explains deadweight loss, which is the loss of total surplus that occurs when market equilibrium is disrupted by government interference or externalities. Various market scenarios, such as monopolies and taxes, are identified as situations that can lead to deadweight loss.

Uploaded by

parminderpcs
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Socially Efficient and

Inefficient Market Outcomes


Allocative Efficiency (Socially Optimal)
• Price = Marginal Cost
• Also shown as equilibrium on a
market graph
• Total economic surplus is maximized
at this point (Consumer + Producer
Surplus)
1. A couple of things
to notice- the
demand curve is Price
consumers
marginal benefit,
and the supply S=MC
curve is producers
marginal cost.
2. If you’re at
equilibrium, then
p
MB=MC
3. In addition, this is
also known as the
socially efficient
quantity, so it’s
also where D= MB
MSB=MSC q Quantity
Deadweight Loss
• What is deadweight loss? The
simple definition is it’s a loss of total
(consumer + producer) surplus.
• Deadweight loss occurs anytime you
move away from equilibrium due to
government interference or
externalities.
What graphs show deadweight loss?
• Monopoly
• Monopolistic
• Tax graphs
• Price Ceiling/Price Floor
• Positive Externalities
• Negative Externalities
• (But not a market in equilibrium or a perfectly competitive firm in the
long-run)

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