CHAPTER 4 FIELD Economic Efficiency And Markets

ECONOMIC EFFICIENCY The central idea of economic efficiency is that there should be a balance between the value of what is produced and the value of what is used up to produce it. (there should be a balance between willingness to pay and the marginal costs of prodution). People dont place the same value on all goods. So, how do we identify the rate of output that is socially efficient? Its the intersection between the aggregate marginal willingness-to-pay curve and the aggregate marginal cost curve. So, we have the efficient level of production for the item, and the common value (the price). (Figure 4-1). When a rate of output is at the socially efficient level, the net value, defined as total willingness to pay minus total costs, is as large as possible. MARKETS Markets are places where buyers and sellers interact over te quantities and prices of particular goods and services. A market system (see demand and suply curve on figure 4-2) will normally produce better economic results overall than any other system. The market system contains within it certain incetive structures that in many cases can be harnessed Howard the objective of improeed environmental quality (Ex. The cost-minimizing incentive that stems from the competitive process, and the incentive provided through the rewards that may be reaped through initiative in finding better, less expensive, technical and organizational means of production). MARKETS AND SOCIAL AFFICIENCY Do markets produce results that are efficient from the standpoint of society? The two rates of output (figure 4-1 and 4-2) are not the same in the real world. The first shows a socially efficient rate of output for a particular item. The second shows the rate of output and price that would prevail on a competitive market fot that item. They are the same if the market demand and supply curves are the same as the marginal cost and willingness-to-pay curves. When enironmental values are concerned, there are likely to be substntial differences between market values and socil values. This is called market failure. EXTERNAL COSTS

There are private costs (the costs of the firm) and external costs (external to firms but internal to society as a whole. Firms do not normally take them into account for their decisions). One of the major types of external cost is the cost inflicted on people through environmental degradation. Social costs = Private Costs + External (environmental) costs (Figure 4-3: el tipico grafico con la demanda y las curvas de costos mg privados y costos mg sociales). Most, but not all, environmetal externalities are expressed through physical linkages among parties involved; that is, polluter and people damaged. The simplest is where there are just two parties involved: one polluter and one person suffering damages. Some externalities do not involve physical linkages. For example, degradation of the scenic environment through thoughtless land development. Open-Access Resources: resource or facility that is open to uncontrolled access by individuals who wish to use the resource. Its one source of external costs. Ex. Ocean fishery. In this situations we have problems in property rights. Thus, when external costs are present, private markets will not normally produce quantities of output that are socially efficient. This market failure may justify public policy to help move the toward efficiency. EXTERNAL BENEFITS Its a benefit that accrues to somebody who is outside, or external, to the decision about consuming or using the good or resource that causes the externality. When the use of an item leads to an external benefit, the market willingness to ay for that item will understate the social willingness to pay. Publis goods: Its a good that, if made available to one person, automatically becomes available to others. Ex. Lighthouse, radio signal. Environmental quality is essentially a public good. When a public good is involved, each person may have an incentive to free ride on the efforts of others. Because of reduced revenues, private firms will normally undersupply goods and services of this thype.