1. Efficiency & Fairness
Chapter 6

2. Resource Allocation methods
Resources are scarce
Methods
Market price
Command
Majority rule
Contest
First-come, first-served
Lottery
Personal characteristics
Force

3. Market Price
Resources are allocated to those that are willing to pay for it
Typical for most resources you would buy in the US
What about those that can’t afford it?

4. Command Resources are allocated by someone’s orders (commands)
In the US, this might be your manager telling you what to do with your time
Some economies are entirely command

5. Majority Rule
Most commonly seen in the form of representative government
Americans elect their leaders, who then vote on budgets, taxes, who gets healthcare, etc.

6. Contest This is the most American, by far
Or, perhaps, the most Darwinian
Spurs productivity as everyone tries to rise to the top
But, THERE CAN ONLY BE ONE!!!

7. First-Come, First-served
You show up first, you get served first
Think of getting on the Beltline when it’s metered
Works best when just one user at a time can be served

8. Sharing Equally Allocation by mutual agreement
Kids taking turns playing with blocks or something
Works best with small groups
Why doesn’t this work for bigger groups?

9. Lottery
Allocation to those who pick the winning number or draw a lucky card
This is how the Bucks can get a top draft pick every year
Don’t worry, they’ll continue to suck for all eternity

10. Personal Characteristics
Allocation of resources based on personal preferences
You pick a spouse based on qualities you like
Someone else might prefer different qualities
Downsides, though

11. Force Might makes right Criminals use force to “re-allocate” resources
Force of the state upholds the principle of “rule of law”
Hmmm…

12. MC = MB MC = Marginal Cost MB = Marginal Benefit
In a perfectly competitive, completely efficient world, these two things must be equal

13. Thoughts… A Marginal Benefit Curve is a demand curve
People will only pay as much for a good as they would benefit
A Marginal Cost Curve is a supply curve
Producer costs for producing each additional unit are marginal costs
This underpins Adam Smith’s ideas about the invisible hand. Markets are efficient because MC=MB.

14. MARKET FAILURE!!! Underproduction Overproduction Deadweight Loss
MB > MC
Overproduction
MC > MB
Deadweight Loss
Decrease in total surplus (consumer & producer) from overproduction or underproduction

15. Sources of market failure
Price & Quantity Regulations
Taxes & Subsidies
Externalities
Public Goods & Common Resources
Monopoly
High Transaction Costs

16. Fairness Rules Results
The state must establish and protect private property rights
Persons must be free to participate in voluntary exchange of goods and services
There is a tradeoff between efficiency and fairness
If we are too efficient, we risk becoming less equal
This is why government has to step in: minimum wage, etc.