DOCSLIB.ORG

Legal Analysis and the Economic Analysis of Allocative Efficiency Richard S

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Legal Analysis and the Economic Analysis of Allocative Efficiency Richard S Hofstra Law Review Volume 8 | Issue 4 Article 1 1980 Legal Analysis and the Economic Analysis of Allocative Efficiency Richard S. Markovits Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/hlr Recommended Citation Markovits, Richard S. (1980) "Legal Analysis and the Economic Analysis of Allocative Efficiency," Hofstra Law Review: Vol. 8: Iss. 4, Article 1. Available at: http://scholarlycommons.law.hofstra.edu/hlr/vol8/iss4/1 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Markovits: Legal Analysis and the Economic Analysis of Allocative Efficiency HOFSTRA lAW REVIEW Volume 8, No. 4 Summer 1980 LEGAL ANALYSIS AND THE ECONOMIC ANALYSIS OF ALLOCATIVE EFFICIENCY Richard S. Markovits* INTRODUCTION Recently, intense interest has been generated by Professor Richard Posner's hypothesis1 that the economic analysis of allocative efficiency (or wealth in Posner's terms) provides a relia- ble algorithm for defining common law rights. 2 The appeal of this hypothesis to various groups is entirely understandable: to those Copyright © 1980 by Richard S. Markovits * Professor of Law, University of Texas. A.B., 1963, Cornell University; Ph.D. 1966, London School of Economics; LL.B., 1968, Yale University. I would like to thank Ronald Dworkin, Jack Getman, Tom Grey, and Inga Markovits for reading a draft of this Article, Guy Wellborn for discussing various deficiencies of Posner's model of the common law of torts, and the participants in the Law School Faculty Re- search Seminar and the Law and Philosophy Reading Group at the University of Texas for commenting on a number of ideas in this paper. 1. See Posner, The Ethical and Political Basis of the Efficiency Norm in Com- mon Law Adjudication, 8 HOFSTRA L. REv. 487 (1980). Some proponents of this hy- pothesis might prefer the following somewhat different formulation: judge-made de- cisions about the relevant set of rights can be accurately predicted by determining which rights definition would be the allocatively most efficient for a court to develop and enforce. This latter formulation makes it clear that the hypothesis is not con- cerned with whether the relevant decisions are legally "correct." Note that both these formulations fail to specify whether the hypothesis refers to the allocative effi- ciency of the relevant rights decision at a given point in time, or to a tendency of such decisions to become more allocatively efficient over time. 2. Proponents of this hypothesis have vacillated when describing its precise do- main; at times, they seem to speak as if it covered all nonstatutory rights, including both fundamental fairness-type constitutional rights and moral rights in pre-legal so- cieties. In less effusive moments, they have restricted its coverage to a subset of common law rights-namely, those that involve issues whose allocatively efficient resolution would damage no significant political group. Published by Scholarly Commons at Hofstra Law, 1980 1 Hofstra Law Review, Vol. 8, Iss. 4 [1980], Art. 1 HOFSTRA LAW REVIEW [Vol. 8:811 who seek certainty in results it appears to offer right answers;3 to those who desire methodological clarity it appears to offer straight- forward instructions for legal problem-solving;4 to those who oppose redistributions to the poor it appears to offer a policy argument as well as a justicizing precedent for their own distributional prefer- ences;5 and to the imperialist economist and economist/lawyer it offers congratulations for possessing a skill that is more useful than would otherwise have been the case. This Article will attempt to show why-despite its obvious appeal-Posner's hypothesis must be rejected. The first three sections of this Article will analyze various defi- ciencies of the attempt by Posner 6 and others7 td demonstrate that the analysis of allocative efficiency is a useful algorithm for the so- lution of common law problems. The first section will criticize the way in which Posner has defined the concept that is central to his whole analysis: the concept of an increase in wealth or allocative ef- ficiency. As we shall see, Posner seems to have been unaware of how difficult it is to operationalize this concept. In this symposium, he mistakenly assumes that the Kaldor-Hicks test can determine whether any given policy will increase allocative efficiency in the sense that decisionmakers employ this term and, equally impor- tantly, in the sense that is most useful for policy analysis. 8 As we shall see, viewed from these perspectives, the Kaldor-Hicks test has several crucial deficiencies which lead its employers to underestimate the allocative efficiency both of policies designed to aid the poor and of government interventions in general. The sec- ond section then examines the evidence Professor Posner cites in 3. The appearance may be illusory since two or more rules may be equally allocatively efficient. 4. Once more, the appearance may be illusory since the actual method that allocatively efficient courts would have to employ in our worse-than-second-best world would be far more complicated and would involve far more judgment than Posner seems to suppose. For a full discussion of the appropriate method, see Markovits, A Basic Structurefor Microeconomic Policy Analysis in Our Worse-than- Second Best World: A Proposal and Critique of the Chicago Approach to the Study of Law and Economics, 1975 Wis. L. REv. 950. 5. As we shall see, this appearance is also somewhat illusory: if the concept of allocative efficiency is defined to conform with the expectations of the decision- makers who employ such data, the goal of achieving such efficiency will conflict less often with egalitarian distributional goals than Posner and others have argued. 6. Posner, supra note 1. 7. E.g., Priest, The Common Law Process and the Selection of Efficient Rules, 6 J. LEGAL STUD. 65 (1977); Rubin, Why is the Common Law Efficient?, 6 J. LEGAL STUD. 51 (1977). 8. Posner, supra note 1, at 491-97. http://scholarlycommons.law.hofstra.edu/hlr/vol8/iss4/1 2 Markovits: Legal Analysis and the Economic Analysis of Allocative Efficiency 1980] ANALYSES OF ALLOCATIVE EFFICIENCY this symposium to support his hypothesis that the common law is allocatively efficient: in particular, this section will show that the common law of torts (which Posner claims has adopted the negli- gence standard as defined by Learned Hand) is not allocatively efficient-that is, is almost certainly not the most allocatively effi- cient set of standards a common law court could adopt. Obviously, given the dubiousness of Posner's evidence, it becomes even more important for him to explain why the common law should have evolved toward allocative efficiency. The third section of this Arti- cle reviews the two types of arguments with which Posner or oth- ers have tried to explain the supposed allocative efficiency of the common law. I will show that no one has yet given a persuasive "economic" account of why disputants and/or judges should act so as to make the common law allocatively efficient and that Posner has failed to justicize a system of allocatively efficient rights. In sum, the first three sections of this Article are designed to show that Posner and the Posnerians (1) have failed to define their basic concept in a satisfactory manner, (2) have failed to adduce persua- sive evidence that the common law is allocatively efficient, and (3) have failed to account for the supposed allocative efficiency of the common law. The fourth section of the Article lists a number of reasons why this result should not be surprising. In particular, this section de- lineates four a priori grounds for doubting the explanatory power of economics in many legal contexts: more specifically, the fourth section examines the extent to which the ability of economics to il- luminate various legal issues is undermined by its inability to dis- tinguish (a) prejudices from tastes, (b) entitlement interests from psychological and welfare interests, (c) liberty as independence from liberty as license, and (d) right-bearing entities from nonright- bearing entities. Finally, the fifth section will delineate in very broad terms my own preliminary views about the relationship be- tween allocative-efficiency analysis, legal analysis, and general pol- icy analysis in our culture and will examine the implications of my approach for the proper way to investigate income distribution and tort law questions. I will argue (a) that there is a crucial distinction between ought claims (which are based on ultimate values) and obligation-right claims (which are based on obligational values), that unlike most other government decisions, common law and fun- damental fairness-type constitutional decisions always involve obligational values and their correlative rights, and that our deepest obligational value is respect for the individual defined as a Published by Scholarly Commons at Hofstra Law, 1980 3 Hofstra Law Review, Vol. 8, Iss. 4 [1980], Art. 1 HOFSTRA LAW REVIEW [Vol. 8: 811 chooser of his or her own ultimate values and life plan; (b) that nei- ther the general methods of positive science nor the particular methods of economics can enable one to determine the implica- tions of this value for specific legal questions; but (c) that econom- ics can provide considerable help to analysts who are seeking to determine the legal and moral implications of these obligational values. THE DEFINITION OF "AN INCREASE IN ALLOCATIVE EFFICIENCY OR WEALTH" Obviously, definitions of such concepts as "an increase in allocative efficiency" can never be right or wrong in the sense in which these terms are normally employed.
Load more

Recommended publications
  • Competition Policy and Efficiency Claims in Horizontal Agreements 1995
    Competition Policy and Efficiency Claims in Horizontal Agreements 1995 The OECD Competition Committee debated competition policy and efficiency claims in horizontal agreements in November 1995. This document includes an analytical note by Mr. John Clark of the OECD, written submissions from Canada, the European Commission, Italy, Japan, Switzerland, the United States and BIAC and an aide-memoire of the discussion. Efficiency claims play a key role in the analysis of mergers and horizontal agreements. Static efficiencies, associated with the production and distribution of existing products, are most often considered relevant. Dynamic efficiencies, of improved processes and products, are also important, but they are inherently more difficult to estimate. Efficiencies tend to play a larger role in analysis of horizontal agreements than in analysis of mergers. There are significant differences across countries in how efficiencies are factored into merger analysis, but there are also broad similarities. Most agencies do not reach consideration of efficiencies unless it is clear that a merger will tend to have anti-competitive effects. In such a case, the parties usually have a significant responsibility to establish that the merger should nevertheless be approved because it promises to yield significant efficiencies that cannot be obtained in less anti-competitive ways. Some countries apply a “consumer surplus” standard. Others apply a “total surplus” standard, which would approve a merger if the real resource savings will cause producers
    [Show full text]
  • Monopoly and the Allocative Inefficiency of First-Best-Allocatively- Efficientor T T Law in Our Worse-Than-Second-Best World: the Whys and Some Therefores
    Case Western Reserve Law Review Volume 46 Issue 2 Article 3 1996 Monopoly and the Allocative Inefficiency of First-Best-Allocatively- Efficientor T t Law in Our Worse-Than-Second-Best World: The Whys and Some Therefores Richard S. Markovits Follow this and additional works at: https://scholarlycommons.law.case.edu/caselrev Part of the Law Commons Recommended Citation Richard S. Markovits, Monopoly and the Allocative Inefficiency of First-Best-Allocatively-Efficientor T t Law in Our Worse-Than-Second-Best World: The Whys and Some Therefores, 46 Case W. Rsrv. L. Rev. 313 (1996) Available at: https://scholarlycommons.law.case.edu/caselrev/vol46/iss2/3 This Article is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. CASE WESTERN RESERVE LAW REVIEW VOLUME 46 WINTER 1996 NUMBER 2 ARTICLES MONOPOLY AND THE ALLOCATIVE INEFFICIENCY OF FIRST-BEST- ALLOCATIVELY-EFFICIENT TORT LAW IN OUR WORSE-THAN-SECOND-BEST WORLD: THE WHYS AND SOME THEREFORES Richard S. Markovits INTRODUCTION .................................. 316 A. The Vocabulary and Conceptual Structure of this Article . 329 1. The Basic Vocabulary of Distortion Analysis ..... 329 2. The Allocative-Efficiency Relevance of YXD(PirA...) Figures ............................. 331 (A) When the Marginal Choice Is Marginal in the Sense of Being Infinitesimally Small as Well as Being Last ..................... 332 (B) When the Marginal Choice Is Incremental Rather than Infinitesimally Small ......... 341 3. Predicting the Effect of a Given Change in a Partic- ular Individual-Pareto-Imperfection-Generated Pri- vate-Profitability Distortion on the Mean of the Distribution of Relevant [ID(P7rA...)j Figures ...
    [Show full text]
  • Types of Efficiency and When to Use Them in the Exam
    Types of efficiency and when to use them in the exam What are the main types of efficiency and when should I use them in the exams? If you are stretching for a high grade at AS and/or A2 you will need to use efficiency concepts in your exam answers – so these notes should be useful! Economic efficiency is about making the best use of our scarce resources among competing ends so that economic and social welfare is maximised over time Allocative efficiency 1. Achieved when the value consumers place on a good (reflected in the price they are willing to pay) equals the cost of the resources used up in production (i.e. price = marginal cost.) 2. Another interpretation: Where resources are allocated to the production of the goods and services the society most values. Productive efficiency 1. Refers to a firm's costs of production and can be applied both to the short and long run. It is achieved when output is produced at minimum AC 2. Productive efficiency implies a. The least costly labour capital and land inputs are used b. The best available technology and the most efficient production processes c. Exploiting economies of scale (getting close to minimum efficient scale) d. Minimizing the wastage of resources in their production processes Dynamic efficiency: 1. Dynamic efficiency occurs in a market over a period of time 2. It focuses on changes in the amount of consumer choice available in markets together with the quality of goods and services available 3. Dynamic efficiency can be boosted by a.
    [Show full text]
  • ECO 212 – Macroeconomics Yellow Pages ANSWERS Unit 1
    ECO 212 – Macroeconomics Yellow Pages ANSWERS Unit 1 Mark Healy William Rainey Harper College E-Mail: [email protected] Office: J-262 Phone: 847-925-6352 Which of the 5 Es of Economics BEST explains the statements that follow: Economic Growth Allocative Efficiency Productive Efficiency o not using more resources than necessary o using resources where they are best suited o using the appropriate technology Equity Full Employment Shortage of Super Bowl Tickets – Allocative Efficiency Coke lays off 6000 employees and still produces the same amount – Productive Efficiency Free trade – Productive Efficiency More resources – Economic Growth Producing more music downloads and fewer CDs – Allocative Efficiency Law of Diminishing Marginal Utility - Equity Using all available resources – Full Employment Discrimination – Productive Efficiency "President Obama Example" - Equity improved technology – Economic Growth Due to an economic recession many companies lay off workers – Full Employment A "fair" distribution of goods and services - Equity Food price controls – Allocative Efficiency Secretaries type letters and truck drivers drive trucks – Productive Efficiency Due to government price supports farmers grow too much grain – Allocative Efficiency Kodak Cuts Jobs - see article below o October 24, 2001 Posted: 1728 GMT [http://edition.cnn.com/2001/BUSINESS/10/24/kodak/index.html NEW YORK (CNNmoney) -- Eastman Kodak Co. posted a sharp drop in third- quarter profits Wednesday and warned the current quarter won't be much better, adding it will cut up to 4,000 more jobs. .Film and photography companies have been struggling with the adjustment to a shift to digital photography as the market for traditional film continues to shrink. Which of the 5Es explains this news article? Explain.
    [Show full text]
  • A Guide to the Perplexed Claims of Efficiency in the Law Lewis A
    Hofstra Law Review Volume 8 | Issue 3 Article 6 1980 A Guide to the Perplexed Claims of Efficiency in the Law Lewis A. Kornhauser Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/hlr Recommended Citation Kornhauser, Lewis A. (1980) "A Guide to the Perplexed Claims of Efficiency in the Law," Hofstra Law Review: Vol. 8: Iss. 3, Article 6. Available at: http://scholarlycommons.law.hofstra.edu/hlr/vol8/iss3/6 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Kornhauser: A Guide to the Perplexed Claims of Efficiency in the Law A GUIDE TO THE PERPLEXED CLAIMS OF EFFICIENCY IN THE LAW Lewis A. Kornhauser* "The truth is rarely pure, and never simple."' Some scholars of law and economics have advanced a bold theory that transforms the study of law from a complex, hydra- headed investigation of fact and value into a straight-forward appli- cation of two "simple" hypotheses: (i) the law should be efficient (the normative claim) and (ii) the law is in fact efficient (the de- scriptive claim).2 This Article argues that the simplicity of these two claims is deceptive. While the normative claim reduces to only two variants, the premises supporting them are controversial. The descriptive claim suffers from greater ambiguity: A wide variety of senses may be attributed to the term "efficiency" and the rule may be efficient relative to only one of a diverse set of alternative rules in possible contexts.
    [Show full text]
  • Some Reflections on the Question of the Goals of EU Competition Law
    Centre for Law, Economics and Society Research Paper Series: 3/2013 Some Reflections on the Question of the Goals of EU Competition Law Professor Ioannis Lianos Centre for Law, Economics and Society CLES Faculty of Laws, UCL Director: Dr Ioannis Lianos CLES Working Paper Series 3/2013 Some Reflections on the Question of the Goals of EU Competition Law Ioannis Lianos January 2013 2 Some reflections on the question of the goals of EU Competition Law 1 IOANNIS LIANOS I. Introduction The literature on the goals of competition law has become a recurrent and rapidly expanding academic business. Since the well-known attack of Judge Robert Bork against the “populist” antitrust of the Warren Court in United States (US) and his assertion, along with other members of the Chicago school, that antitrust should have economic efficiency (what is considered now as a total welfare standard) as a single objective,2 a plethora of academic articles and books in the US have challenged or supported this thesis and have advanced different theoretical frameworks on the goals of antitrust3. More recently, the debate has gained prominence in Europe, with a number of publications dedicated to this topic4. Although the debate in Europe is not as polarized as in the United States and has less 1 Director, Centre for Law, Economics and Society, Faculty of Laws, UCL; Reader in Competition Law and Economics, UCL Faculty of Laws; Gutenberg Research chair, Ecole Nationale d’Administration (ENA), France. I would like to thank Andres Palacios Lleras for his comments. Any errors are those of the author alone.
    [Show full text]
  • Efficiency Determinants and Dynamic Efficiency Changes in Latin American Banking Industries M
    Working Paper 2007-WP-32 December 2007 Efficiency Determinants and Dynamic Efficiency Changes in Latin American Banking Industries M. Kabir Hassan and Benito Sanchez Abstract: This paper investigates the dynamic and the determinants of banking industry efficiency in Latin America. Allocative, technical, pure technical and scale efficiencies are calculated and analyzed in each country. We find that Latin American bank managers have been using resources efficiently, but they are not choosing an optimal input/output. Additionally, we find that traditional banking performance measures are positively correlated with efficiencies while variables that measure banking and financial structure development and macroeconomics present mixed results. About the Authors: Dr. Kabir Hassan is a tenured professor at the University of New Orleans and also holds a visiting research professorship at Drexel University, Philadelphia. He is a financial economist with consulting, research and teaching experiences in development finance, money and capital markets, corporate finance, investments, monetary economics, macroeconomics and international trade and finance. He has published five books, over 70 articles in refereed academic journals and has presented over 100 research papers at professional conferences globally. Dr. Benito Sanchez is an Assistant Professor of Finance at Kean University (Union, NJ.), teaching Corporate Finance, Investment and Financial Institutions and Markets. He has taught finance courses at University of New Orleans and at Loyola University New Orleans. Dr. Sanchez research focuses in asset pricing and banking efficiencies. Keywords: Latin American banks, cost efficiency, revenue efficiency. JEL Classification: D2, G2, G21, G28. The views expressed are those of the individual author(s) and do not necessarily reflect official positions of Networks Financial Institute.
    [Show full text]
  • Legal Analysis and the Economic Analysis of Allocative Efficiency: a Response to Professor Posner's Reply
    LEGAL ANALYSIS AND THE ECONOMIC ANALYSIS OF ALLOCATIVE EFFICIENCY: A RESPONSE TO PROFESSOR POSNER'S REPLY Richard S. Markovits* Agreed: debates must end. But occasionally, a Reply is so inad- equate that a Response would be useful. My article in the Hofstra Law Review Response Symposium on Efficiency as a Legal Con- cern1 developed a number of criticisms of claims that have been made for the capacity of economics to contribute to an understand- ing of law. These criticisms were then illustrated by more detailed analyses of portions of the "new law and economics" literature. Some of my comments applied particularly to Professor Posner's own work, though on the whole my objections were intended to be more general. After the publication of the Symposium, Professor Posner was afforded the opportunity to answer the various critiques it con- tained.2 I will not speak for the other participants. However, the por- tions of his Reply that relate to my own comments are so misleading that a Response is warranted. Professor Posner did not address the major criticisms I made both of his work and of the more extreme claims that he and others have made for the capacity of economics to illuminate the law. On several occasions, he attributed to me posi- tions that I did not and would not take on various relevant matters. When Professor Posner addressed some of the things which I did, in fact, say, his Reply was simply incorrect. Before proceeding, it may be useful for me to set the back- ground for this Response to Posner's Reply by delineating the posi- * Co-Director, Centre for Socio-Legal Studies, Wolfson College, Oxford; Member, Faculty of Law, Oxford University; Professor, University of Texas Law School.
    [Show full text]
  • Economies (Efficiencies) – an Essential Consideration in Merger Analysis
    ECONOMIES (EFFICIENCIES) – AN ESSENTIAL CONSIDERATION IN MERGER ANALYSIS Kaushal Sharma*, Shankar Singham** and Sriraj Venkatasamy*** 1 CONTENTS : A. Efficiencies F. Comparative Chart on Role Of B. Incorporating Efficiencies in Merger Efficiencies In Merger Analysis analysis G. Trade-off – Welfare Standards a. Efficiencies as a part of substantive i. Price standard assessment ii. Consumer surplus b. Efficiencies as a defense iii. Hills-down c. Authorization iv. Total surplus C. Merger specificity v. Weighed surplus D. Pass-on Requirements H. Merger Efficiencies and Indian E. Effect of Merger on Price and Allocation Competition Act, 2002 Patterns I. Conclusion. Abstract: “While the purport of competition law is to preserve and promote competition, the essential object of competition is to ensure optimal allocation of available resources, produce more while using less resources and thus achieve efficient market outcomes. Generally, the efficiency is accepted as a defense in competition law. Ignorance of economies (efficient use of resources) by competition law and competition enforcement agencies would prejudice the very object of preserving competition. However, one should also acknowledge that scientific quantification and weighing of efficiencies are complex tasks. Like any other law, the competition law jurisprudence is an evolving organism. In nearly all jurisdictions there were times when merger review was limited to anticipation of acquiring of market power by the combining enterprises. It was not uncommon to see that, sometimes, market power was also confused with market share of the combined entities after merger. With introduction of economic concepts and more and more reliance on economics, the situation is fast changing. In present day competition law jurisprudence, it is no more a mechanical reliance on the anti competitive effects of a merger, but these anti-competitive effects have to be examined in the background of obtaining efficiencies.
    [Show full text]
  • The Allocative Efficiency of Shifting from a Negligence System to A
    Chicago-Kent Law Review Volume 73 Issue 1 Symposium on Second-Best Theory and Article 3 Law & Economics December 1997 The Allocative Efficiency of Shifting omfr a Negligence System to a Strict-Liability Regime in our Highly-Pareto-Imperfect Economy: A Partial and Preliminary Third-Best-Allocative-Efficiency Analysis Richard S. Markovits Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview Part of the Law Commons Recommended Citation Richard S. Markovits, The Allocative Efficiency of Shifting omfr a Negligence System to a Strict-Liability Regime in our Highly-Pareto-Imperfect Economy: A Partial and Preliminary Third-Best-Allocative-Efficiency Analysis, 73 Chi.-Kent L. Rev. 11 (1998). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol73/iss1/3 This Article is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact [email protected], [email protected]. THE ALLOCATIVE EFFICIENCY OF SHIFTING FROM A "NEGLIGENCE" SYSTEM TO A "STRICT-LIABILITY" REGIME IN OUR HIGHLY-PARETO-IMPERFECT ECONOMY: A PARTIAL AND PRELIMINARY THIRD-BEST- ALLOCATIVE-EFFICIENCY ANALYSIS RICHARD S. MARKOVITS* INTRODUCTION ................................................. 20 1. DISTORTION ANALYSIS: THE VOCABULARY AND CONCEPTUAL STRUCTURE OF THIS ARTICLE ............ 30 1. The Basic Vocabulary of Distortion Analysis ......... 30 2. The Allocative-Efficiency Relevance of 7,D(PrA...) Figures ............................................... 32 A. When the Marginal Choice in Question Is Marginal in the Sense of Being Infinitesimally Small as Well as in the Sense of Being Last ...
    [Show full text]
  • An Investigation of the Technical and Allocative Efficiency of Broadacre Farmersa
    An Investigation of the Technical and Allocative Efficiency of Broadacre Farmersa Ben Hendersonb & Ross Kingwellc Contributed Paper to the 46th Annual Conference of the Australian Agricultural and Resource Economics Society, 13-15 February, 2002, Rydges Lakeside Hotel, Canberra. a This research has been supported by the Grains Research and Development Corporation, the University of Western Australia and the Department of Agriculture. b MSc student, University of Western Australia c Visiting senior lecturer, University of Western Australia and Senior adviser, Western Australian Department of Agriculture Abstract The technical and allocative efficiency of broadacre farmers in a southern region of Western Australia is investigated over a three-year period. Applying data envelopment analysis (DEA) and stochastic frontier analysis (SFA) reveals there is some inefficiency in each year, which decreases over time. The distributions of technical efficiency in each year are positively skewed toward higher efficiency levels, indicating a majority of farms produce close to their maximum technical efficiency. DEA and SFA produce similar efficiency rankings of farms yet DEA rankings are more stable. The relationships between farm-specific variables and the DEA and SFA efficiency scores are investigated. There is evidence that farmers benefit from using at least a small amount of tillage, rather than using ‘no-till’ practices. Education levels and farmer age are found to positively influence technical efficiency. Using a DEA profit efficiency model, the duality between the directional distance function and the profit function allows the decomposition of economic efficiency into its technical and allocative components. Greater gains in profitability are possible by improving allocative rather than technical efficiency.
    [Show full text]
  • Monopolistic Competition and Oligopoly
    Monopolistic Competition and Oligopoly Chapter Outline 1. Monopolistic Competition a. Product Differentiation b. Price and Output Determination c. Economic Efficiency 2. Oligopoly a. Oligopoly Models b. Game Theory c. Economic Performance d. Industrial Concentration Monopolistic Competition Monopolistic Competition – industry with many firms, easy entry, and product differentiation. Product Differentiation – creating a product with distinct positive identities in consumers minds. Demand Curve – downward sloping, more elastic than monopoly but less elastic than perfect competition Price and output determination in the short-run: looks identical to the monopoly case. Price and output determination in the long-run: because of entry of other firms profits will not be greater than zero. Therefore, there will be zero economic profits in the long-run. Efficiency: 1. Productive Efficiency – min AC, does not hold 2. Allocative Efficiency – P = MC, does not hold Oligopoly Models Oligopoly – industry with few firms, difficult entry, mutual interdependence, and standardized or differentiated product. Collusion – the act of working together to restrict output. Cartels act like monopolists in the output market. Cartel – the firms that collude. -- Prevailing output and price is that of the monopolist. Cournot Model – duopoly where each firm assumes that output of the other firms are given and the firms maximize profits. -- Prevailing output is between monopolist and perfect competition. Kinked Demand – oligopoly where each firm believes that their competitors will match price decreases but not their price increases. Chapter 13 Page 1 of 2 Case / Fair -- Results in downwardly sticky prices at the current price. Price-Leadership Model – model where the large firm (dominant) sets market price and all the smaller firms match the leaders price.
    [Show full text]