outline18 - Economics 103 Lecture 18 Transaction Cost...

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Economics 103 Lecture # 18 Transaction Cost Economics
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We’ve examined a powerful model, but there are some unanswered questions. When I go skiing at Cypress Bowl, how come I face A line up means there is excess demand. Why does the price not increase?
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We’ve mentioned before, every classroom has Unemployed, or underemployed, resources imply a surplus, why don’t prices adjust in order to eliminate the surplus?
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We’ve seen how great prices are in allocating resources and explaining behavior, but think of all the times prices are NOT used. You don’t bid for: -
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When you go work for a firm, your boss isn’t going to use prices to tell you what to do. Professors can only wish grades were distributed this way.
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There are just lots of instances in life where we either ban the use of prices (kidneys) or we simply choose not to use them. What explains this?
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Finally, we all know that in life cheating happens all the time. - People goof off at work.
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The point is, in the model we’ve examined so far, these types of things should never happen . We’ve been assuming prices work for free. A theoretical device is to assume there is an imaginary auctioneer out there who knows everything, and calls out all the magic prices to equate Supply and Demand. But we are really assuming that everyone knows everything.
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Let’s start by looking at an implication of Omniscience. Suppose a rancher and a farmer know everything.
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outline18 - Economics 103 Lecture 18 Transaction Cost...

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