externalities - Prices and Externalities 1. Trade a....

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Prices and Externalities 1. Trade a. Voluntary trade has the potential to make all partners in the trade better off. i. People would not trade if it made them worse off. b. If trade actually happens, somebody must be better off. c. Trade opens the door to (Pareto) improvements. d. If (Pareto) improvements are available, and trade is possible, then voluntary trade will tend to exploit that opportunity for improvement. 2. Repeated trade opens the door to achieving efficiency a. There is no possibility for voluntary trade if there are no (Pareto) improvements available. i. If there are no pareto improvements, then trade would necessarily make somebody worse off. b. So, trade will continue until there is no possibility for further (pareto) improvements. This characterises efficiency. 3. This is a nice idea, and it can be shown that voluntary trade really does result in efficiency if the ‘if conditions’ of the first fundamental theorem are true. 4. Prices a. Why can we speak of ‘a’ price for a good? Couldn’t there be many prices for a good? i. The buyers would all want the lowest price, and the sellers would all want the highest price. ii. If buyers and sellers can choose who they trade with, they’ll choose the ones that are best for them. iii. The sellers will choose the buyer with the highest price (willingness to pay); the buyers will choose the seller with the lowest price. iv.
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This note was uploaded on 09/13/2009 for the course ECONOMICS econ 104 taught by Professor Krishnapendakur during the Spring '09 term at Simon Fraser.

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externalities - Prices and Externalities 1. Trade a....

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