Economics: Efficiency and Fairness of Markets

Essential Foundations of Economics

• This is the ninth edition of a textbook on economics.

Should Ticket Scalping Be Illegal?

• Ticket scalping is the practice of reselling tickets for a higher price than the original.
• The internet facilitates this practice.
• Economists generally believe that ticket scalping should not be illegal because it creates a secondary market for tickets.

Efficiency and Fairness of Markets

• The study of this chapter enables understanding of methods for allocating scarce resources and evaluating their efficiency and fairness.
• Alternative resource allocation methods include market price, command, majority rule, contest, first-come, first-served, sharing equally, lottery, personal characteristics, and force.

Allocation Methods and Efficiency

• Resource Allocation Methods:
  • Scarce resources can be allocated using market price, command, majority rule, contest, first-come, first-served, sharing equally, lottery, personal characteristics, or force.
• Market Price:
  • Resources allocated based on willingness to pay.
  • This method governs labor markets and most products.
• Command:
  • Resources allocated through orders from an authority figure.
  • Effective in organizations with clear authority lines, but less so for entire economies.
• Majority Rule:
  • Resources allocated based on the majority vote.
  • Useful for decisions affecting many people, especially when individual self-interests must be suppressed for efficient resource use (e.g., tax policies for public goods).
• Contest:
  • Resources awarded to a winner or a group of winners.
  • Effective when the efforts of competitors are hard to monitor and reward directly (e.g., sporting events, awards).
• First-Come, First-Served:
  • Resources allocated to those who are first in line.
  • Serves best when scarce goods can only be used by one person at a time (e.g., restaurant tables, airline standby seats).
• Sharing Equally:
  • Resources divided equally among all participants.
  • Works well in small groups sharing common goals and ideals.
• Lottery:
  • Resources allocated randomly.
  • Useful when there is no effective way to distinguish among potential users of scarce resources (e.g., lottery tickets, concert tickets.)
• Personal Characteristics:
  • Resources allocated based on pre-determined characteristics.
  • Although used to determine pairing partners, it can lead to unacceptable outcomes when used for discriminatory practices against minorities and women.
• Force:
  • Resources allocated using coercive means like theft or war.
  • Although rarely a primary method, force can be used by a governing body to reallocate wealth (e.g., tax policies.)

Using Resources Efficiently

• Allocative Efficiency:
  • Allocation of resources producing goods and services most valued by people.
  • It is impossible to create more of one resource without producing less of another.
• Efficiency and the PPF:
  • Production at the highest-valued point on the PPF.
• Marginal Benefit:
  • Benefit received by consuming one more unit of a good or service.
  • Decreases as the quantity consumed increases.
• Marginal Cost:
  • The opportunity cost of producing one more unit of a good or service.
  • Measured by the slope of the production possibility frontier (PPF).
  • Increases as more of the good is produced.

Value, Price, and Consumer Surplus

• Demand and Marginal Benefit:
  • Buyers value price and the product.
  • Price is what they pay; the value is what they get.
  • Marginal benefit is the value placed on one more unit of a good or service.
  • Demand curve represents marginal benefit.
• Consumer Surplus:
  • Consumer surplus is the marginal benefit from a good or service minus the price paid for it, summed over the quantity consumed.

Cost, Price, and Producer Surplus

• Supply and Marginal Cast:
  • Sellers' view of cost and price.
  • Sellers' costs are their opportunity costs.
  • Price is what they get in exchange
  • Marginal cost is the cost for the opportunity to produce one more unit.
• Supply Curve:
  • Supply curve is a marginal cost curve.
  • For buyers, the quantity that is supplied at a given price.
• Producer Surplus:
  • Producer surplus is the difference between price (received for a good or service) and the marginal cost incurred to produce that amount.

Are Markets Efficient?

• Market Failure:

  • A situation where the market does not generate an efficient allocation of resources.
  • Occurs due to underproduction or overproduction

• Deadweight Loss:

  • Reduction in total surplus caused by underproduction or overproduction.
  • Social loss that is borne by society as a whole.

• Overproduction:

  • Results of a government subsidy.
  • The quantity produced exceeds the efficient quantity.

• Sources of Market Failure:

  • Price and quantity regulations
  • Taxes and subsidies
  • Externalities (e.g., pollution)
  • Public goods and common resources
  • Monopoly
  • High transactions costs

• Alternatives to the Market: No single method for allocation resources. The market, however, does a good job in resource allocation, improved by other methods, especially in cases of market failure.

Are Markets Fair?

• Fairness:
  • Two conflicting views of fairness exist: the fairness of rules and the fairness of outcomes.
• Fairness of Rules:
  • Equality of opportunity where the rules are fair and protect individual property.
  • Voluntary exchange is the only way to transfer assets.
• Fairness of Outcomes:
  • The result is too unequal.
  • A balance between fairness and efficiency.
• The Big Tradeoff: Efficiency and fairness often clash. Redistributing income to reduce inequality leads to lowered efficiency, lowering the total size of the economic pie.

Eye on Ticket Scalping

• Ticket scalping is a practice where tickets are resold for a higher price than the original price.
• The internet enables the practice.
• Economists view it as efficient because it creates a secondary market, leading to greater overall surplus.