If goods have a social benefit much greater than private benefit, they are likely to be under-consumed. Explain
Answers
plus, and deadweight loss.
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Key Points
Economic efficiency is the idea that it is impossible to improve the situation of one party without imposing a cost on another.
If a situation is economically inefficient, it becomes possible to benefit at least one party without imposing costs on others.
Consumer surplus is the gap between the price that consumers are willing to pay—based on their preferences—and the market equilibrium price.
Producer surplus is the gap between the price for which producers are willing to sell a product—based on their costs—and the market equilibrium price.
Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price.
Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity.
Introduction
Did you know that demand and supply diagrams can help us understand more than supply and demand curves and equilibrium? They can also help us understand economic efficiency!
Efficiency is one of those words you might hear in day-to-day conversation, but it means something a little different to economists. In economics, efficiency means it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others.
The meaning of efficiency can become even more specific than that, though! In the demand and supply model, efficiency means that the economy is getting as much benefit as possible from its scarce resources and all possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.