Chapter 13 - Krugman_Econ_CH13_312-332 9/7/04 2:21 PM Page...

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>> HEN THE BERLIN WALL CAME down in 1989, Western observers got their first good look at the centrally planned economy of East Germany. What they found was a stunningly inefficient system. Although investment had been lavished on politically favored industries such as energy produc- tion, producers of consumer goods and services were starved for capital. And the consumer goods that were produced were often not what consumers wanted to buy. The revelation of East German ineffi- ciency showed how badly such a planned economy worked compared with a market economy, like that of West Germany. But even after the wall had come down, the government of the newly unified Federal Republic of Germany was not willing to let the free market run its course. Instead, both industry and individuals in East Germany received huge amounts of financial aid. The goal was to prevent the emergence of a Efficiency and Equity AFTER THE FALL chapter 312 13 W What you will learn in this chapter: How the overall concept of effi- ciency can be broken down into three components— efficiency in consumption, efficiency in production, and efficiency in output levels How a perfectly competitive market for a single good achieves efficiency in all three components Why an economy consisting of many perfectly competitive markets is typically, but not always, efficient The limits of the concept of efficiency—in particular, why efficiency is about how to achieve goals but not about which goals are chosen politically unacceptable level of inequality between the former East Germans, many of whom lost their jobs in the aftermath of reunification, and West Germans. Over time, many economists have come to believe that this aid actually delayed the reconstruction of the East German econo- my. They argue that the aid reduced incen- tives for workers to relocate to areas where more jobs were available or to learn new skills. But German officials insist that the price was well worth paying: sometimes a sense of fairness, they argue, is more important than efficiency. Germany’s experience reminds us that although we want our economy to be effi- cient, we also want it to be fair. In this chap- ter we will address both concerns. We begin by discussing the efficiency of a competitive market economy—the effectiveness of a com- petitive market economy at producing the goods and services that people want to con- sume. We then turn to the less well-defined Pierre Merimme/Corbis Getty Images Goods produced in centrally planned economies (consider the East German–produced Trabant at left) are notorious for their poor quality compared to stylish, high-quality goods produced in market economies (consider the West German–produced Mercedes at right).
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Chapter 13 - Krugman_Econ_CH13_312-332 9/7/04 2:21 PM Page...

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