IBE316-3 - IBE 316 Economic Policy Stiglitz Economics of...

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IBE 316 Economic Policy Stiglitz: Economics of the Public Sector Chapter 3: Market E¢ ciency Keisuke OTSU Sophia University FLA Spring 2008 OTSU (Sophia University FLA) IBE 316 Spring 2008 1 / 21
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Announcement Slides Slides are currently available at http://caseyohtsu.googlepages.com/ibe316 They will soon be shifted to moodle OTSU (Sophia University FLA) IBE 316 Spring 2008 2 / 21
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Overview Focus Questions What do economists mean when they say the economy is e¢ cient? Why is there a general presumption that competitive markets result in e¢ ciency? OTSU (Sophia University FLA) IBE 316 Spring 2008 3 / 21
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Overview Settings A perfect world perfect competition perfect information (everybody knows the prices) no externalities In order to analyze the real world, we want to analyze the perfect world and then consider the di/erences between the two OTSU (Sophia University FLA) IBE 316 Spring 2008 4 ± 21
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The Invisible Hand of Competitive Markets The Invisible Hand of Competitive Markets Adam Smith says. .. competition would lead the individual in the pursuit of his private interest to pursue the public interest, as if by an invisible hand the public interest is served when each individual simply does what is in his own self-interest if there is something that individuals value but is not produced, they will to pay for it goods and services needed by individuals will be produced in the most e¢ cient way OTSU (Sophia University FLA) IBE 316 Spring 2008 5 / 21
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Welfare Economics and Pareto E¢ ciency Welfare Economics and Pareto E¢ ciency maximizes welfare of the economy Pareto optimal (e¢ cient): no one can be made better o/ without someone being worse o/ Pareto improvement: a change which makes some individuals better o/ without making anyone worse o/ OTSU (Sophia University FLA) IBE 316 Spring 2008 6 ± 21
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IBE316-3 - IBE 316 Economic Policy Stiglitz Economics of...

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