Market Efficiency and Government Intervention

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Chapter 6

• Market Efficiency and Government Intervention

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The Benefits of Market-Based Exchange

• Why do we trade??
• Make both consumers and producers better off.
• How can we measure the gains from exchange?
• Consumer Surplus
• Producer Surplus

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Consumer Surplus

• The benefit that a consumer gets from an
  additional unit of a good is equal to the
  difference between
• What a consumer is willing and able to pay
  (marginal benefit)
• Demand curve graphs the marginal benefit
• What they actually have to pay (the actual
  price).

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Figure 6.1(a) The Relationship Between Market
Price and Marginal Benefit
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Consumer Surplus

• Marginal consumer
• Indifferent between buying and not buying a good.
• Receive no consumer surplus

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Consumer Surplus

• This extra satisfaction you get can be graphed
• Area under the demand curve and above the market
  price

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Examples

• How would each of the following impact consumer
  surplus?
• A decrease in input prices?
• A decline in technology?
• An increase in the number of firms in the area?
• A per unit tax on the good sold?
• Inverse relationship between price and consumer
  surplus

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Producer Surplus

• The benefit that a producer gets from producing
  an additional unit of a good is equal to the
  difference between
• The price they actually receive
• What it costs to produce an additional unit of
  output (marginal cost).
• Represented by the supply curve

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Producer Surplus

• What is the benefit for producers??
• Get a higher price than hoped for
• Can see this benefit with the supply curve.
• Area above the supply curve and below the market
  price

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Figure 6.3 Producer Surplus in a Competitive
Market
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Gains from Exchange

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Application Taxes and Competitive Equilibrium

• A per-unit tax adds a fixed dollar amount to each
  unit of a good sold.
• Per-unit tax shifts the supply curve left

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How find??

• Find equilibrium price
• Supply shifts left in the amount of the tax
• Find new equilibrium
• Find point of second equilibrium on ORGINAL
  supply curve
• Shows the actual price realized by firm or
  equilibrium price tax point in question
• Difference between points determines how much of
  tax you pay

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Figure 6.4 The Effect of a Per-Unit Tax on
Laptop Sales