econ434notes17

econ434notes17 - History of Economic Doctrines Session 17...

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History of Economic Doctrines Session 17 Neoclassical Economics I Review : The birth of classical economics is usually attributed to publication of the Wealth of Nations [1776], by Adam Smith (1723-1790). However, inklings of the classical advocacy of market forces are found in the works of William Petty (1623-1687), Richard Cantillon (1680- 1734), and the French physiocrat François Quesnay (1694-17774). Classical economics peaked when it was synthesized in Principles of Political Economy [1848], by John Stuart Mill (1806- 1873). The end to the dominance of classical economics was inevitable after neoclassical economics emerged when French engineers started applying calculus to economic issues in the 1830s. Early French Engineers Who Addressed Economic Issues A. Jules E. Dupuit Arsene Jules Etienne Dupuit (1804-1866) was a French engineer now credited with being the first writer to apply calculus to economic problems. Duplicate material below should be merged with the preceding paragraph. In his 1844 article titled “On the Measure of the Utility of Public Works”, Dupuit implicitly uses the concept of diminishing marginal utility to construct an early version of demand curve for public goods. He asserts that as the quantity of a good consumed by the user rises, the marginal utility of the good declines. Therefore, the lower the toll for crossing the bridge (lower marginal utility), the more people would use it (higher consumption). Following his logic, the concept of diminishing marginal utility should translate itself into a downward-sloping demand function.
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In addition, Dupuit argues that it would be inefficient to charge a price equal to an average costs to people who gains very little by crossing the bridge, and proposes that the government should charge people according to the different utilities they receive from the service (price discrimination). (Note: Dupuit’s logic does not address the fact that marginal utility is particular to an individual while market demand is an aggregate.) Dupuit’s Price Discrimination Model Consider a bridge with a high fixed cost. Once built, the marginal cost of using it is zero. Thus, to equate marginal social benefit and marginal social cost, the optimal price for the last person interested in crossing the bridge is zero (point a in this figure). Dupuit implicitly argued that efficiency requires advantageous transactions to be consummated until any further transaction is at best a zero-sum game. (This condition is now known as Pareto efficiency). Anytime you can gain and someone else does not lose, then you have an inefficient point because you could voluntarily trade and increase gains. For example, the draft is inefficient
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because you have a group that that is willing to exchange voluntarily by paying the other party a higher wage than the army pays in order to take their place. In this case, both would be efficient through exchange. This is also why the lottery system is inefficient for a draft.
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This note was uploaded on 01/12/2010 for the course ECON 434 taught by Professor Byrns during the Spring '09 term at UNC.

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econ434notes17 - History of Economic Doctrines Session 17...

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