28.Is the Competitive Market Efficient?

The marginal benefit to the entire society is the marginal social benefit curve, MSB. If all the benefits from a good go to its consumers, the market demand curve is the same as the MSB curve.

The marginal cost to the entire society is the marginal social cost curve, MSC. If all the costs of producing a good are paid by the producers, the market supply curve is the same as the MSC curve.

When the marginal social benefit of the last unit produced equals its marginal social cost, society attains efficiency. However, because the demand curve is the same as the MSB curve and the supply curve is the same as the MSC curve, the quantity that sets the MSB equal to the MSC also sets the quantity demanded equal to the quantity supplied and so is the equilibrium quantity.

29.Obstacles to Efficiency

The key obstacles to achieving an efficient allocation of resources in a market are:

1. Price and Quantity Regulations: If a price ceiling or price floor makes the equilibrium price illegal, it can lead to inefficiency.

2. Taxes and Subsidies: Taxes and subsidies place a wedge between the prices consumers pay and the prices producers receive.

3. Externalities: An externality is a cost of a benefit that affects someone other than the seller or the buyer.

4. Public Goods and Common Resources: Public goods lead to a free-rider problem, in which people do not pay for their share of the good. Common resources are generally over-used because no one owns the resource.

5. Monopoly: A monopoly is a firm that has sole control of a market. To maximize its profit, a monopoly produces less than the efficient quantity and so creates inefficiency.

6. High transactions costs: The opportunity costs of making a trade are transactions costs. When these costs are high, a market might underproduce because too few transactions take place.

30.Is the Competitive Market Fair?

There are two general ways of defining fairness: “It’s not fair if the results aren’t fair” and “It’s not fair if the rules aren’t fair.”

It’s Not Fair If the Result Isn’t Fair. Utilitarianism adopts this view. Utilitarianism is a principle that states that we should strive to achieve “the greatest happiness for the greatest number.” This principle argues that fair-ness requires equality of incomes, which requires that incomes be redistributed.

It’s Not Fair If the Rules Aren’t Fair

This perspective relies on the symmetry principle—the requirement that people in similar situations should be treated similarly. In economics, this means equality of economic opportunity rather than equality of economic outcomes.

31. The Firm and Its Economic Problem

• A firm is an institution that hires factors of production and organizes those factors to produce and sell goods and services

• The firm’s goal is to maximize its profit. If a firm fails to maximize profit it is either eliminated through competition or bought out by other firms seeking to maximize profit.

Accounting Profit and Economic Profit

• A firm’s accounting profit is the firm’s revenues minus expenses and depreciation.

• A firm’s economic profit is equal to total revenue minus total cost, with total cost measured as the opportunity cost of production.

A Firm’s Opportunity Cost of Production

• A firm’s decisions respond to opportunity cost and economic profit. A firm’s opportunity cost of production is the value of the best alternative use of the resources that a firm uses in production.

• Opportunity costs of production include the cost of resources that are bought in the market, owned by the firm, or supplied by the firm’s owner.