If utility- and profit-maximizing choices are made in the context of a price system that confronts decision makers with all of the costs and all of the benefits of their choices, the allocation of resources will be efficient An efficient allocation is one that maximizes the net benefit of every activity The concepts of consumer and producer surplus show us how this net benefit is shared Equity is a separate issue, one that calls for a normative evaluation of the fairness of the distribution of income The allocation of resources will be inefficient in the absence of competitive markets It will also be inefficient if property rights are not exclusive and transferable These two conditions break down when there are public goods, common property resources, or external benefits or costs In each of these cases, public sector intervention may improve the efficiency of resource allocation When a market fails to achieve the efficient solution, net benefit falls short of the maximum possible Deadweight loss is the amount by which net benefit falls below the net benefit possible at the efficient solution CONCEPT PROBLEMS What is achieved by selecting the quantity of an activity at which marginal benefit equals marginal cost? Suppose the marginal benefit of an activity exceeds the marginal cost What does the marginal decision rule say a maximizing decision maker will do? Suppose you are a discus hurler and your goal is to maximize the distance you achieve You “produce” discus hurls by practicing The total benefit of practice is distance achieved, and the input that achieves this distance is hours of practice Describe the total benefit curve of practice What point on the curve would you select? Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 343