Once the market is in equilibrium, there is no way to increase the gains from trade.
Competitive markets are usually efficient because:
They allocate consumption of the good to the potential buyers who most value it.
They allocate sales to the potential sellers who most value the right to sell the good (e.g., who have
the lowest cost).
They ensure that all transactions are mutually beneficial
As a result: any way of allocating the good other than the market equilibrium outcome lowers total
surplus.
An efficient market equilibrium maximizes total surplus – the gains to buyers and sellers in that
market.
When each and every market in the economy maximizes total surplus, then the economy as a whole
is efficient
Theoretical result: it is virtually impossible to find an economy in which every market is efficient.
1. property rights: system in which valuable items in the economy have specific owners who can
dispose of them as they choose. In a system of property rights, by purchasing a good you
receive “ownership rights”.
- are what make the mutually beneficial transactions in any market possible
- create and protect incentives to trade with others & innovate
- patents & copyright
2. economic signals: any piece of information that helps people and businesses make better
economic decisions. Example: prices!
Equilibrium prices signal to resources exactly where they are most valued: they convey information
about other people’s cost and their willingness to pay.
Adam smith said for the economy to succeed one is to have self-love but not be selfish
The efficiency of markets:
1. Although a market may be efficient, it isn’t necessarily fair.
2. Markets sometimes fail: when this occurs, markets no longer maximize total surplus.
3. Even when the market equilibrium maximizes total surplus, this does not mean that it results
in the best outcome for every individual consumer and producer.
- The market equilibrium is efficient. No other outcome achieves higher total surplus.
- Government cannot raise total surplus by changing the market’s allocation of resources.
- The government should not interfere with the market.
Competitive markets are usually efficient because:
They allocate consumption of the good to the potential buyers who most value it.
They allocate sales to the potential sellers who most value the right to sell the good (e.g., who have
the lowest cost).
They ensure that all transactions are mutually beneficial
As a result: any way of allocating the good other than the market equilibrium outcome lowers total
surplus.
An efficient market equilibrium maximizes total surplus – the gains to buyers and sellers in that
market.
When each and every market in the economy maximizes total surplus, then the economy as a whole
is efficient
Theoretical result: it is virtually impossible to find an economy in which every market is efficient.
1. property rights: system in which valuable items in the economy have specific owners who can
dispose of them as they choose. In a system of property rights, by purchasing a good you
receive “ownership rights”.
- are what make the mutually beneficial transactions in any market possible
- create and protect incentives to trade with others & innovate
- patents & copyright
2. economic signals: any piece of information that helps people and businesses make better
economic decisions. Example: prices!
Equilibrium prices signal to resources exactly where they are most valued: they convey information
about other people’s cost and their willingness to pay.
Adam smith said for the economy to succeed one is to have self-love but not be selfish
The efficiency of markets:
1. Although a market may be efficient, it isn’t necessarily fair.
2. Markets sometimes fail: when this occurs, markets no longer maximize total surplus.
3. Even when the market equilibrium maximizes total surplus, this does not mean that it results
in the best outcome for every individual consumer and producer.
- The market equilibrium is efficient. No other outcome achieves higher total surplus.
- Government cannot raise total surplus by changing the market’s allocation of resources.
- The government should not interfere with the market.
