There must be many buyers and sellers so that no

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Health Economics and Policy
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Chapter 1 / Exercise 5
Health Economics and Policy
Henderson
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agreeing to its terms). There must be many buyers and sellers, so that no single buyer or seller (and no group of buyers or sellers colluding together) can impose the prices they want. Several other assumptions may also be important. The Neoclassical View Implicitly, the neoclassical story appeals to ideas about freedom, equity (fairness), and efficiency. Very few people would say they are against any of these virtues, but different people embrace different definitions. Different people, for example, have different ideas about what people should have the freedom to do, and what “freedoms” would impinge on the freedoms, rights, or well-being of others. So really the issue is, when neoclassical economists say that unregulated market competition is desirable, for example, as a mat- ter, of “freedom,” what view of freedom are they basing this on? Freedom By “freedom,” neoclassical economists mean freedom from force or threat of force. They would recognize that someone making an exchange when threatened with vio- lence—when confronted with “an offer they can’t refuse,” in the Godfather sense of that phrase—is not really engaging in a voluntary transaction. That person could very well make an exchange leaving them worse off than they would have been otherwise (except that they may have saved their own neck). On the other hand, suppose a person is faced only with very undesirable alternatives to engaging in a trade. Suppose they have “no choice” but to accept a job, because the alternative is to starve. Neoclassical
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Health Economics and Policy
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CHAPTER 1: PERSPECTIVES ON MICROECONOMIC THEORY | 19 economists would point out that these circumstances are not of the potential employ- er’s making. It is quite unlike, in their view, conditions that are directly imposed by the other party (like having a gun held to one’s head). If the impoverished worker accepts a job offer, even at a very low wage or under very bad working conditions, the neoclassical economist would argue that this is evidence that he or she really is made better off by the exchange. Restricting his or her freedom to engage in this exchange, in the neoclassical view, only makes him or her worse off. Equity Neoclassical economists argue that restrictions on market competition can unfairly benefit some market participants (buyers or sellers) or potential market participants at the expense of others. This kind of equity concern enters into neoclassical theory in several ways: First, restrictions on competition may affect the ability of different people (or firms) to participate in a market—to offer what they have for sale or to bid on what others offer for sale. Suppose that the government issues special licenses to some people or firms that permit them to engage in a certain trade, like driving a taxi, while deny- ing such licenses to others. (Such policies create “barriers to entry,” in the language of neoclassical economics.) Such restrictions are, in the neoclassical view, unfair to the unlucky (or less-influential) individuals or firms who do not receive licenses and so are locked out of the market.

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