9781118041581

Market Efficiency 297

An agreement calling for 10 hours of day care per week delivers the max-

imum total gain to the parties together. For this reason, we call such a trans-

action efficient.In contrast, an agreement that called for only five hours of day

care per week would furnish only $20 of total gain ($10 to each side). Although

this agreement is better than nothing, it would rightly be labeled inefficient

because it generates less than the maximum total gain. (More than 10 hours is

infeasible because the grandmother is willing to supply 10 hours at most.)

We note two simple, but important, points about the efficiency concept.

First, the actual price negotiated is nota matter of efficiency. An agreement

calling for 10 hours of day care at a price of $7 (or at any other price between

$4 and $8) would generate the same total profit, $40 per week. Of course, at

$7 the total gain is redistributed. The grandmother’s profit is $30 per week,

and the couple’s is $10. But the total gain has not changed. In algebraic terms,

the total gain is

CS(8P)Q(P4)Q4Q.

FIGURE 7.5

A Day-Care Transaction

This transaction

provides the couple

with a consumer

surplus of $20 per

week and the

grandmother with a

profit of $20 per week.

Couple’s

maximum

value

Grandmother’s

cost

Price

$8

4

6

2

2 4 6 8 10 12

Q

Hours of Day Care per Week

Dollars per Hour

0

Producer profit

$20 per week

Consumer surplus

$20 per week

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