26.Demand and Marginal Benefit: The value of one more unit of a good or service is its marginal benefit. Marginal benefit is the maximum price that people are willing to pay for another unit of a good or service. And the willingness to pay for a good or service determines the demand for it. So the demand curve for a good or service is also its marginal benefit curve.
27.Supply and Marginal Cost: The cost of producing one more unit of a good or service is its marginal cost. Marginal cost is the minimum price that producers must receive to induce them to produce another unit of the good or service. And the minimum acceptable price determines the quantity supplied. So the supply curve for a good or service is also its marginal cost curve.
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:
Price and Quantity Regulations: If a price ceiling or price floor makes the equilibrium price illegal, it can lead to inefficiency.
Taxes and Subsidies: Taxes and subsidies place a wedge between the prices consumers pay and the prices producers receive.
Externalities: An externality is a cost of a benefit that affects someone other than the seller or the buyer.
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.
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.
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.