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

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IBE 316 Economic PolicyStiglitz: Economics of the Public SectorChapter 3: Market E¢ ciencyKeisuke OTSUSophia University FLASpring 2008OTSU(Sophia University FLA)IBE 316Spring 20081 / 21
AnnouncementSlidesSlides are currently available atThey will soon be shifted to moodleOTSU(Sophia University FLA)IBE 316Spring 20082 / 21
OverviewFocus QuestionsWhat do economists mean when they say the economy is e¢ cient?What conditions have to be satis°ed if markets are to be e¢ cient?Why is there a general presumption that competitive markets result ine¢ ciency?OTSU(Sophia University FLA)IBE 316Spring 20083 / 21
OverviewSettingsA perfect worldperfect competitionperfect information (everybody knows the prices)no externalitiesIn order to analyze the real world, we want to analyze the perfectworld and then consider the di/erences between the twoOTSU(Sophia University FLA)IBE 316Spring 20084 / 21
The Invisible Hand of Competitive MarketsThe Invisible Hand of Competitive MarketsAdam Smith says...competition would lead the individual in the pursuit of his privateinterest to pursue the public interest, as if by an invisible handthe public interest is served when each individual simply does what isin his own self-interestif there is something that individuals value but is not produced, theywill to pay for itif there is pro°t opportunity, an entrepreneur will produce itonly the °rm that produces the good at the lowest cost will survivegoods and services needed by individuals will be produced in the moste¢ cient wayOTSU(Sophia University FLA)IBE 316Spring 20085 / 21
Welfare Economics and Pareto E¢ ciencyWelfare Economics and Pareto E¢ ciencyWelfare economics: evaluate alternative policies to °nd the one thatmaximizes welfare of the economyPareto optimal (e¢ cient): no one can be made better o/ withoutsomeone being worse o/Pareto improvement: a change which makes some individuals bettero/ without making anyone worse o/OTSU(Sophia University FLA)IBE 316Spring 20086 / 21

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