Ch16_General Equilibrium and Economic Efficiency.ppt

Chapter 16 Chapter 16 General Equilibrium and Economic Efficiency 吴福象 南京大学产业经济学系 信箱：fxiangwu@nju.edu.cn 电话：025办公室安中楼1505) Topics to be Discussed General Equilibrium Analysis Efficiency in Exchange Equity and Efficiency Efficiency in Production Topics to be Discussed The Gains from Free Trade An Overview: The Efficiency of Competitive Markets Why Markets Fail General Equilibrium Analysis Up to this point, we have been focused on partial equilibrium analysis Activity in one market has little or no effect on other markets Market interrelationships can be important Complements and substitutes Increase in firms’ input demand can cause market price of the input and product to rise General Equilibrium Analysis To study how markets interrelate, we can use general equilibrium analysis Simultaneous determination of the prices and quantities in all relevant markets, taking into account feedback effects The feedback effect is the price or quantity adjustment in one market caused by price and quantity adjustments in related markets Two Interdependent Markets – Moving to General Equilibrium Scenario The competitive markets of: DVD rentals Movie theater tickets These goods are substitutes Changing prices in one market are likely to affect the other market Two Interdependent Markets – Moving to General Equilibrium Scenario Equilibrium price of movies is $6.00 Equilibrium price of DVD rentals is $3.00 Government places a $1.00 tax on each movie ticket Need to look at effect of tax on Market for DVDs Feedback effects in movie market Two Interdependent Markets – Movies and DVDs Two Interdependent Markets – Movies and DVDs Two Interdependent Markets – Movies and DVDs Observation Without considering the feedback effect with general equilibrium, the impact of the tax would have been underestimated This is an important consideration for policy makers You can check for yourself that in the market for complements, the tax would be overestimated Reaching General Equilibrium Must