Atul Arya
Comparative Economics of Transforming
World Economy
Comparative Development Perspective
HS30002
Chapter 2
The Theory and Practice of Market Capitalism
Answers:
1. “Income inequality is necessary for Pareto optimality so that people will work as hard
as they can.” “If income is distributed equally, then there must be Pareto optimality
because you can’t make one person better off without making someone else worse off.”
Are these statements true or false? Why or why not?
TRUE
necessary condition for Pareto optimality:
An economy might be efficient according to Pareto if it has completely equal distribution of
income (GINI=0 ) or if one person has everything and everyone else is starving to death
(GINI1), just as long as no one can be made better off without making someone else worse off,
redistribution of income leads to economic stagnation. In this scenario, consumption is reduced because of the
lower average propensity to consume of the rich, who invest the income in expanded production, which leads
to a surplus, as the market has diminished
2. How does the U.S. economy compare with other market capitalist economies with
respect to its degree of industrial concentration and the nature of its antitrust policies?
Generally, the United States has a more competitive and less concentrated economy than
other countries. This is because of its sheer size—it can support more firms in most industries
than can many smaller economies. But this also reflects the stronger tradition of the U.S.
antitrust enforcement. If we compare with other market capitalist economies, In Japan, many
firms that are officially independent have very close relationships with other firms through the
“family of companies” groupings known as keiretsu. South Korea has similar groupings known
as chaebol. Both Japan and South Korea have higher degrees of concentration relative to the
United States.
Among market economies, the United States has had the most vigorous antitrust policy.
The beginning of its policy was the Sherman Act of 1890, which forbids “efforts to monopolize
interstate trade.”
Clayton Act of 1914, which forbids tying contracts, and price discrimination;
Federal Trade Commission (FTC) Act of 1914, which forbids false advertising.
Comparative Economics of Transforming
World Economy
Comparative Development Perspective
HS30002
Chapter 2
The Theory and Practice of Market Capitalism
Answers:
1. “Income inequality is necessary for Pareto optimality so that people will work as hard
as they can.” “If income is distributed equally, then there must be Pareto optimality
because you can’t make one person better off without making someone else worse off.”
Are these statements true or false? Why or why not?
TRUE
necessary condition for Pareto optimality:
An economy might be efficient according to Pareto if it has completely equal distribution of
income (GINI=0 ) or if one person has everything and everyone else is starving to death
(GINI1), just as long as no one can be made better off without making someone else worse off,
redistribution of income leads to economic stagnation. In this scenario, consumption is reduced because of the
lower average propensity to consume of the rich, who invest the income in expanded production, which leads
to a surplus, as the market has diminished
2. How does the U.S. economy compare with other market capitalist economies with
respect to its degree of industrial concentration and the nature of its antitrust policies?
Generally, the United States has a more competitive and less concentrated economy than
other countries. This is because of its sheer size—it can support more firms in most industries
than can many smaller economies. But this also reflects the stronger tradition of the U.S.
antitrust enforcement. If we compare with other market capitalist economies, In Japan, many
firms that are officially independent have very close relationships with other firms through the
“family of companies” groupings known as keiretsu. South Korea has similar groupings known
as chaebol. Both Japan and South Korea have higher degrees of concentration relative to the
United States.
Among market economies, the United States has had the most vigorous antitrust policy.
The beginning of its policy was the Sherman Act of 1890, which forbids “efforts to monopolize
interstate trade.”
Clayton Act of 1914, which forbids tying contracts, and price discrimination;
Federal Trade Commission (FTC) Act of 1914, which forbids false advertising.
