Ch02 The Efficiency Criterion 2015
Chapter 2
THE EFFICIENCY CRITERION
Public Finance, 10th Edition
David N. Hyman
Adapted by Chairat Aemkulwat for Public Economics 2952331
Chairat Aemkulwat, Public Economics 2952331
Positive Economics
1. Positive and Normative Economics
• Scientific approach to analysis that establishes cause-andeffect relationships among economic variables
• Attempts to be objective
• Formulates “If…then” hypotheses that can be checked against facts
3
Chairat Aemkulwat, Public Economics 2952331
Normative Economics
1. Positive and Normative Economics
• Designed to formulate recommendations as to what should be accomplished
• Not objective
• Begins with predetermined criteria and is used to prescribe policies that best achieve those criteria
• Useful to the positive approach in that it defines relevant issues Positive Economics is useful to the normative approach in that it cannot make recommendations to achieve certain outcomes without an underlying theory of human behavior.
Chairat Aemkulwat, Public Economics 2952331
4
The Efficiency Criterion
2. Normative Economics of Resource Use: The Efficiency Criterion
• Normative criterion for evaluating effects of resource use on individual well-being
• Satisfied when resources are used in such a way as to make it is impossible to increase the well-being of any one person without reducing the well-being of another
• Often referred to as the criterion of Pareto optimality
Chairat Aemkulwat, Public Economics 2952331
5
Marginal Conditions for Efficiency
2. Normative Economics of Resource Use: The Efficiency Criterion
•
Total social benefit – any given quantity of an economic good available in a give time period will provide satisfaction to those who consume it
•
Marginal social benefit – the extra benefit by making one more unit of that good available in a given time period
•
Total social cost – the value of all resources necessary to make a given amount of the good available
•
Marginal social cost – minimum sum
THE EFFICIENCY CRITERION
Public Finance, 10th Edition
David N. Hyman
Adapted by Chairat Aemkulwat for Public Economics 2952331
Chairat Aemkulwat, Public Economics 2952331
Positive Economics
1. Positive and Normative Economics
• Scientific approach to analysis that establishes cause-andeffect relationships among economic variables
• Attempts to be objective
• Formulates “If…then” hypotheses that can be checked against facts
3
Chairat Aemkulwat, Public Economics 2952331
Normative Economics
1. Positive and Normative Economics
• Designed to formulate recommendations as to what should be accomplished
• Not objective
• Begins with predetermined criteria and is used to prescribe policies that best achieve those criteria
• Useful to the positive approach in that it defines relevant issues Positive Economics is useful to the normative approach in that it cannot make recommendations to achieve certain outcomes without an underlying theory of human behavior.
Chairat Aemkulwat, Public Economics 2952331
4
The Efficiency Criterion
2. Normative Economics of Resource Use: The Efficiency Criterion
• Normative criterion for evaluating effects of resource use on individual well-being
• Satisfied when resources are used in such a way as to make it is impossible to increase the well-being of any one person without reducing the well-being of another
• Often referred to as the criterion of Pareto optimality
Chairat Aemkulwat, Public Economics 2952331
5
Marginal Conditions for Efficiency
2. Normative Economics of Resource Use: The Efficiency Criterion
•
Total social benefit – any given quantity of an economic good available in a give time period will provide satisfaction to those who consume it
•
Marginal social benefit – the extra benefit by making one more unit of that good available in a given time period
•
Total social cost – the value of all resources necessary to make a given amount of the good available
•
Marginal social cost – minimum sum