EC4101 Week 05 Lecture 02 PDF

EC4101 Wk.05 Lec.02 Total Surplus: The total net gain to consumers and producers from trading in the market. The sum of the producer and consumer surplus. Total Surplus is maximised at Market Equilibrium: → Goods are allocated to potential buyers who value them the most and who have the h...

EC4101 Wk.05 Lec.02 Total Surplus: The total net gain to consumers and producers from trading in the market. The sum of the producer and consumer surplus. Total Surplus is maximised at Market Equilibrium: → Goods are allocated to potential buyers who value them the most and who have the highest willingness to pay. → Sales are allocated to potential sellers who most value the right to sell the good, indicated by the fact that they have the lowest cost. → It ensures that every consumer who buys a good values it more than every seller who makes a sale, so all transactions are mutually beneficial. → It ensures that every potential buyer who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale, so that no mutually beneficial transactions are missed. Sometimes, governments intervene in markets to ensure equity, reducing efficiency. Why Markets typically work well: Property Rights: The rights to owners of valuable items, to dispose of those items as they choose. Economic Signals: Any pieces of information that helps people make better economic decisions. Inefficient Market: One where opportunities are missed, where some people could be made better off without making others worse off. This can be because of market power, information asymmetry, public goods or externalities. Stated Preferences: Observations where one would measure what individuals say they would do in a given context. It provides a value of a non-market good and/or a planned policy change. Specially constructed questionnaires to elicit estimates of the WTP for a particular outcome are used: Contingent Valuation Method (e.g. how much would you pay a month to keep a public amenity open) Discrete Choice Experiment Method References: Notes based on EC4101 Lecture Slides