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In: Economics

How efficiency and fairness can be achieved int he US markets? I want the answer in...

How efficiency and fairness can be achieved int he US markets? I want the answer in four paragaph

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Expert Solution

Markets are efficient when resources are used to produce the goods and services people value most highly. When marginal benefit equals the marginal cost, the efficient quantity is produced. The sum of consumer surplus and producer surplus is maximized at a competitive equilibrium. According to Adam Smith, each participant in a competitive market is “led by an invisible hand to promote an end which was no part of his intention.” The efficient quantity of a good is the quantity that makes marginal benefit from the good equal to marginal cost of producing it. If marginal benefit exceeds marginal cost, resources use will be more efficiently if the quantity is increased. If marginal cost exceeds marginal benefit, resource use will be more efficiently if the quantity is increased. At the market equilibrium, resources are used efficiently.

In a competitive market the demand curve shows buyers’ marginal benefit. The supply curve shows the sellers’ marginal cost so at the equilibrium in a competitive market; marginal benefit equals marginal cost where resources are used efficiently. So the competitive market is efficient.

The requirement that people in similar situations be treated similarly. Two broad and generally conflicting views of fairness are:

  • It’s not fair if the result isn’t fair.
  • It’s not fair if the rules aren’t fair.

Fair if the Result Isn’t Fair:

  • Utilitarianism- A principle that states that we should strive to achieve “the greatest happiness for the greatest number.” To achieve this outcome, income must be transferred from the rich to the poor until no one is rich or poor. Only if everyone’s share of the economic pie is the same as everyone else’s are resources being used in the most efficient way and bringing the greatest attainable total benefit.
  • Big tradeoff - A tradeoff between efficiency and fairness that recognizes the cost of making income transfers. The tradeoff is between the size of the economic pie and the degree of equality with which it is shared. The greater the amount of income redistribution through income taxes, the greater is the inefficiency —the smaller is the economic pie.

It’s Not Fair if the Rules Aren’t Fair

For example, if price hike in a natural disaster shop offers water for $5 and he owns the water. It is not fair that he should be compelled to help. Government buys water for $8 government offers the water for sale for $1 a bottle, its “normal” price.


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