Text reads as follows:

Evaluating Public Policies

Positive Analysis: Describes what is happening, explaining why, or predicting what will happen.

Normative Analysis: Prescribes what should (in bold typeface) happen, which involves value judgements.

Policies can be evaluated using the criteria of:

Economic Efficiency: An outcome is more economically efficient if it yields more Economic Surplus.

Equity: An outcome yields greater equity if it results in a fairer distribution of economic benefits.

Measuring Economic Surplus

Economic Surplus: The benefit of an action, less the cost. Economic Surplus equals Marginal benefit minus Marginal cost.

Consumer Surplus: The economic surplus you get from buying something. Consumer surplus equals Marginal benefit minus Price.

Producer Surplus: The economic surplus you get from selling something. Producer surplus equals to Price minus Marginal cost.

Economic Surplus equals Consumer Surplus plus Producer Surplus.

Two graphs show Quantity along the horizontal axes and Price along the vertical axes.

The first graph shows a dotted line labeled Price drawn parallel to the horizontal axis. A Demand curve (equals Marginal benefit) with a negative slope and a Supply curve (equals Marginal cost) with a positive slope intersect each other at a point on the Price line. The triangular area formed by the starting points of the Demand curve and the Supply curve and their point of intersection is labeled Economic surplus.

The second graph shows a dotted line labeled Price drawn parallel to the horizontal axis. A Demand curve (equals Marginal benefit) with a negative slope and a Supply curve (equals Marginal cost) with a positive slope intersect each other at a point on the Price line. The triangular area formed by the starting points of the Demand curve and the Price line and their point of intersection is labeled Consumer surplus plus. The triangular area formed by starting points of the Supply curve and the Price line and their point of intersection is labeled Producer surplus.

Market Efficiency

Efficient Outcome: The efficient outcome yields the largest possible Economic Surplus. Markets create efficient outcomes by:

1. Efficient Production: Producing a given quantity of output at the lowest possible cost, which requires producing each good at the lowest marginal cost.

2. Efficient Allocation: Allocating goods to create the largest Economic Surplus, which requires that each good goes to the person who’ll get the highest marginal benefit from it.

3. Efficient Quantity: The quantity that produces the largest possible Economic Surplus. The Rational Rule for Markets (underlined): Produce more of a good if its marginal benefit is greater than (or equal to) the marginal cost.

Measuring the costs of Market Failure

Market failure: When the forces of supply and demand lead to an inefficient outcome.

Deadweight loss: How far Economic Surplus falls below the Efficient Outcome.

Deadweight loss equals Economic surplus at efficient quantity minus Actual economic surplus.

Government failure: When government policies lead to worse outcomes.