lecture2 - 1. Lecture 2: Why Is There a State? Efficiency...

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Lecture 2: Why Is There a State? 1. Efficiency a. A Pareto improvement (hereafter just improvement ) is a change that makes somebody better off without making somebody else worse off. i. A strict improvement makes everyone better off ii. An improvement makes somebody better off without making somebody else worse off. iii. All strict improvements are improvements iv. Improvements are good—why throw away the possibility of making somebody happier? (1) what if it causes envy? (2) well, when you take the envy into account, then perhaps it isn’t an improvement. b. A situation is efficient if there are no improvements available, that is, there is no way to make somebody better off without making somebody else worse off. i. Standard economists’ definition of efficiency. It is very weak. (1) Even if we could make everyone except the king better off at the expense of the king, we would still call the status quo efficient by this definition. ii. It is a minimal definition of goodness. If your situation is not efficient, then it is pretty bad—it is like you are throwing an opportunity away. c. Trade i. Trade between people may be defined as individuals buying and selling goods and services with each other for a price. ii. Trade enables people to get together and make each other better off. iii. If I am good at baking but not sewing, and you are good at sewing but not baking, then individually, we would be deprived of either good food or good clothing. However, if we trade with each other, then we could each produce twice as much of the thing we are good at, and none of the thing we are bad at, and trade with each other so that each of us has both good food and good clothing. iv. This is the miracle of the market. v. Another miracle is that under very general conditions, there is a set of prices (in this example a price for food and a price for clothing) such that if we trade at these prices, we will end up with an efficient situation. vi. Another miracle, is that under some conditions (described in detail below), private markets with no government intervention and free trade between people results in exactly this set of prices (the efficient set of prices). (1) This is the classic story for why government intervention in private markets might be bad: if governments just leave people alone (and the ‘some conditions’ mentioned above are satisfied), then people will trade to reach an efficient situation. However, if (under those ‘some conditions’), governments intervene to change the price for any good, then the market will NOT deliver efficiency. d.
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lecture2 - 1. Lecture 2: Why Is There a State? Efficiency...

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