第16章 General Equilibrium and Economic Efficiency.ppt

THE GAINS FROM FREE TRADE 16.5 AN OVERVIEW—THE EFFICIENCYOF COMPETITIVE MARKETS 16.6 It is essential to review our understanding of the workings of the competitive process. We thus list the conditions required for economic efficiency in exchange, in input markets, and in output markets. 1. Efficiency in exchange: All allocations must lie on the exchange contract curve so that every consumer’s marginal rate of substitution of food for clothing is the same: A competitive market achieves this efficient outcome because, for consumers, the tangency of the budget line and the highest attainable indifference curve assure that: AN OVERVIEW—THE EFFICIENCYOF COMPETITIVE MARKETS 16.6 2. Efficiency in the use of inputs in production: Every producer’s marginal rate of technical substitution of labor for capital is equal in the production of both goods: A competitive market achieves this efficient outcome because, for consumers, the tangency of the budget line and the highest attainable indifference curve assure that: AN OVERVIEW—THE EFFICIENCYOF COMPETITIVE MARKETS 16.6 3. Efficiency in the output market: The mix of outputs must be chosen so that the marginal rate of transformation between outputs is equal to consumers’ marginal rates of substitution: A competitive market achieves this efficient outcome because, for consumers, the tangency of the budget line and the highest attainable indifference curve assure that: As a result, But consumers maximize their satisfaction in competitive markets only if Therefore, (for all consumers) (for all consumers) WHY MARKETS FAIL 16.7 Suppose that unions gave workers market power over the supply of their labor in the production of food. Too little labor would then be supplied to the food industry at too high a wage and too much labor to the clothing industry at too low a wage. In the clothing industry, the input efficiency conditions would be satisfied. In the food industry, the wage paid would be greater than the wage paid in