Static Efficiency

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Static Efficiency

• Getting it right here and now

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Efficiency static v. dynamic

• Static efficiency - efficient use of resources
  in one period of time
• Dynamic efficiency takes into account all
  consequences of resource allocation choice,
  current and future.

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Static Efficiency Defining benefits

• What are the benefits of an additional unit of a
  good or service?
• Whatever buyers are willing to pay, i.e. Marginal
  WTP
• MWTP becomes MSB, Marginal Social Benefit
• Total social benefits for any specific quantity
  are the sum of the marginal social benefits of
  each unit area under the MSB
• Recall that this includes total expenditure and
  consumer surplus

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Static Efficiency Benefits diagram
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Static Efficiency Defining costs

• Marginal social cost (MSC) includes the marginal
  costs to society of production, including costs
  to resource owners and any external costs
• Total social costs for any specific quantity are
  the sum of the marginal social costs of each unit
  area under MSC
• Recall that total revenue includes total social
  costs and producer surplus

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Static Efficiency Costs diagram
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Static Efficiency Defining net social benefits

• Net Social Benefits are the difference between
  Total Social Benefits and Total Social Costs
• Marginal net social benefits are the difference
  between marginal social benefit and marginal
  social cost of any one particular unit MSB - MSC

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Static Efficiency Net social benefits diagram
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Static Efficiency objective

• Efficient use of resources means producing the
  quantity which maximizes the Net Social Benefits
• Since Net Social Benefits increase from a
  quantity of 0 so long as MSB gt MSC, at the
  quantity at which MSB MSC the increase stops.

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Static Efficiency CS and PS
Notice that total benefits total costs is also
equal to CS PS so that maximizing net social
benefits is equivalent to maximizing CS PS.
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Static Efficiency Maximizing Net social
benefits diagram
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Producing too much

• How much is too much here and now?
• Any quantity beyond that which maximizes net
  social benefits is too much
• Note that for each unit beyond the efficient
  quantity MSB lt MSC, i.e. it is worth less than it
  costs

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Producing too little

• How much is too little here and now?
• Any quantity less than that which maximizes net
  social benefits is too little
• Note that for each unit less than the efficient
  quantity MSB gt MSC, i.e. it is worth more than it
  costs

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Solved problem 1

• Given the following equations for MSB and MSC for
  extracting coal
• MSB 150 - .25q
• MSC 50 .25q
• Plot the MSB and MSC curves for quantities from 0
  to 300 in increments of 50 units
• Find the quantity that maximizes net social
  benefits in the graph and mathematically
• Identify the efficient price
• Find Total benefits, total costs, consumer
  surplus, producer surplus and net benefits
• Verify that net social benefits CS PS

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Solved problem 1 - Plot MSB, MSC and identify
efficient quantity
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Static efficiency using equations

• Efficient quantity found where MSB MSC
• MSB 150 - .25q
• MSC 50 .25q
• Set the two equations equal to each other
• 150 - .25q 50 .25q
• And solve for q 100 .5q
• 200 q
• Find price by evaluating either equation for the
  efficient quantity
• 150 - .25200 100

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Static Efficiency measuring net benefits

• Net Social Benefits are the difference between
• Benefits Total expenditure CS
  1002000.5(150-100)200 20,000 5,000
  25,000
• Total costs 502000.5(100-50)200
  15,000 (area b)
• NSB Benefits costs 10,000
• Producer surplus, PS Total expenditure total
  cost 20,000 - 15,000 5,000
• CS PS 10,000 Net social benefits

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Solved problem 2

• Find the equation that describes marginal net
  social benefits
• Show that marginal net social benefits 0 at the
  efficient quantity.

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Solved problem 2

• Marginal net social benefit MSB MSC
• MSB 150 - .25q
• MSC 50 .25q
• MNSB (150 - .25q) (50 .25q) 100 - .5q
• Find quantity where Marginal net benefit 0
• MNB 100 - .5q 0
• Q 200

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Solved problem 3

• Find the MSB and MSC of producing one more than
  the efficient quantity
• Find the MNSB of this unit.

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Solved problem 3 producing too much

• MSB 150 - .25201 99.75
• MSC 50 - .25201 100.25
• MNSB 100 - .5201 -0.5
• i.e. one more unit is worth less than it costs to
  produce