Economic Efficiency and Cost - Managerial Economics - Lecture Slides, Slides of Managerial Economics

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ECONOMIC EFFICIENCY & COST

ECONOMIC EFFICIENCY

OUTCOMES OF LANDING FEE

POLICY

 The Port Authority charges airlines landing fees based on aircraft weight. The fees are on average of $6 per passenger and do not vary with the time of day.  During peak hours, the demand for takeoffs and landings at Newark exceeds capacity.  FAA presented a 10-year plan limiting scheduled takeoffs and landings to 81 per hour and establishing an auction for landing and takeoff slots.  However, the Port Authority, major airlines resisted the FAA plan.  FAA abandoned the plan and sought other ways to relieve congestion at Newark.

APPLICATION OF MANAGERIAL

ECONOMICS

 Takeoff and landing slots at an airport with limited runway capacity are a scarce resource.  However, if the slots are allocated by administrative rule, the allocation of resources might not be economically efficient.

ECONOMIC EFFICIENCY V.S. TECHNICAL

EFFICIENCY

 Contrast economic efficiency vis-à-vis technical efficiency  Technical efficiency  producing at lowest possible cost  doesn’t consider how much benefit the item provides

ADAM SMITH’S INVISIBLE HAND: PRICE

 Competitive market achieves three sufficient condition for economic efficiency:  buyers and sellers in a market system act independently and selfishly, yet the overall outcome is efficient  i) users buy until marginal benefit equals price;  ii) producers supply until marginal cost equals prices;  iii) users and producers face same price.

EXAMPLE OF INVISIBLE HAND

 Major policy issue: how to allocate licenses for 3G wireless telecommunications;  “beauty contest” -- France  auction – Germany, UK, US  pioneer: in early 1990s, US Federal Communications Commission showed that spectrum licenses were worth billions;  created pressure on other governments to allocate by auction and not favoritism.  Auction ensures that item goes to user with highest marginal benefit.

UCLA ANDERSON SCHOOL, 1989

Half an invisible hand is worse than none  priced photocopying paper  free bond paper

0 1100 290 300 310 supply demand b equilibrium excess demand Quantity (Thousand units a month) Price ($ per month)

RENT CONTROL: EQUILIBRIUM

1000 900

0 1100 290 300 310 supply demand b Quantity (Thousand units a month) Price ($ per month)

RENT CONTROL: SURPLUSES

1000 900 d g e buyer surplus gain = cfeg buyer surplus loss = dgb seller surplus loss = cfeg + geb c f

PRICE FLOOR

Lower limit that sellers can charge and buyers can pay  minimum wage  agricultural price supports

0

8 10 11 supply demand a b c equilibrium excess supply Quantity (Billion worker-hours a week) Wage ($ per hour)

MINIMUM WAGE: EQUILIBRIUM

MINIMUM WAGE: LOSSES

 deadweight losses -- sellers willing to provide item at price that buyers willing to pay, but provision doesn’t occur  price elasticities of demand and supply _supply more inelastic --> larger loss _demand more elastic --> larger loss

TAX: COMMODITY TAX

“the only two sure things in life are death and taxes”  buyer’s price - tax = seller’s price  payment vis-à-vis incidence  US: airlines pay tax  Asia: passengers pay