note_ch7 - Chapter 7 The Efficiency of markets This chapter...

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Chapter 7 The Efficiency of markets This chapter studies the question of whether a market economy leads to the best economic outcome. Specifically, does a market system generate the largest benefit to society, or does an alternative system of allocating goods do a better job? To figure this out, we’ll first quantify the benefits of the market economy, and then show that the benefits from any other allocation of goods is smaller than the benefits under the market economy. First, let’s look at the benefits buyers receive from a market economy. To keep it simple, imagine it is a one good economy. The benefits consumers receive from a market economy is related to the price they pay, relative to the value they receive from the good. This is called consumer surplus, which we will define a bit later .
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The first step in understanding the benefits consumers receive is to understand willingness to pay, and how it may differ across the population.
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