Week3IdealMarkets

Week3IdealMarkets - (4) PRESENCE OF EXTERNALITIES [FAILURE...

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NUMERICAL EXAMPLE Q S = Q D 3P – 9 = 36 – 2P 2P + 3P = 36 + 9 5P = 45 P = 45/5 = 9 Q S = 3P – 9 = 27 – 9 = 18 Q D = 36 – 2P = 36 – 18 = 18 EFFICIENT OUTCOME IF AND ONLY IF MARKET MAXIMIZES TOTAL SURPLUS [ADAM SMITH’S INVISIBLE HAND] REQUIRES MAKE ALL TRANSACTIONS WHERE MPB > MPC AND MAKE NO TRANSACTIONS WHERE MPB < MPC EFFICIENCY FAILURES (1) USE OF MARKET POWER [ABSENCE OF PRICE-TAKING] BY WITHHOLDING DEMAND OR SUPPLY (2) USE OF INFORMATIONAL POWER [FAILURE OF PERFECT INFORMATION] BY WITHHOLDING INFO, LYING (3) USE OF POLITICAL (OR EXTERNAL) POWER [FAILURE TO REMAIN WITHIN MARKET STRUCTURE] BY SEEKING GOVERNMENT INTERVENTION
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Unformatted text preview: (4) PRESENCE OF EXTERNALITIES [FAILURE OF MARKETS TO BE COMPLETE] FROM COSTS, BENEFITS IMPACTING OTHERS BUT HAVING NO MARKET PRICE COMPONENTS OF IDEAL MARKETS (1) PRICE-TAKING, VOLUNTARY, RATIONAL BUYERS MPB = P D (2) PRICE-TAKING, VOLUNTARY, RATIONAL SELLERS P S = MPC (3) NO INFORMATION ASYMMETRIES (FULL INFO) AND NO GOVERNMENT INTERVENTION UNIFORM PRICE P D = P S (4) ALL INTERACTIONS VIA MARKETS (COMPLETE MARKETS) NO EXTERNAL COSTS MSB = MPB &amp; MPC = MSC (1) (4) =&gt; MSB = MPB = P D = P = P S = MPC = MSC SO, MSB = MSC...
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Week3IdealMarkets - (4) PRESENCE OF EXTERNALITIES [FAILURE...

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