ECO101H1 Lecture Notes - Lecture 1: Coase Theorem, Allocative Efficiency, Marginal Utility
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ECO101H1 Full Course Notes
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Last semester: assumed that the outcome of the perfectly competitive market was desirable because it maximizes surplus (monopolies create dwl) Governments can act as regulators of monopolies. Market failure occurs when the free market, absent government intervention, fails to achieve allocative efficiency. I. e. when the outcome of the perfectly competitive market does not maximize total surplus. We will look at 2 types of market failures: externalities (social cost to product/consumption): governments as regulators of externality, public goods : government provision of public goods (e. g. roads, parks) generating actions. Allocative efficiency (aka market efficiency): when, for each good produced, the marginal cost of production (often represented by the supply curve) is equal to the price, and thus the marginal value to buyers (represented by the demand curve) The sum of producer and consumer surplus ( i. e. total surplus) is maximized at the allocatively.
