COMM 220 Lecture Notes - Lecture 7: Fundamental Theorems Of Welfare Economics, Pareto Efficiency, Edgeworth Box
2 Dec 2018
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Document Summary
A market fails when price does not re ect true value in the sense that a price ratio formed with that price is not equal to peoples" marginal rates of substitution. In the extreme, the market may collapse or not exist to begin with because either there are no consumers willing buy at the. Wrong price or there are no sellers willing to sell. To understand why a market might fail, we need to look back at the first welfare theorem: a competitive equilibrium is pareto optimal. People (and rms) behaving as price takers is a suf cient condition for a pareto optimum. But there are a number of characteristics or defects that can cause an otherwise competitive market to be, well, less than competitive, scuttling the optimum. If a rm can lower its costs with- out end simply by getting bigger, it will come to dominate a market and wield monopoly power.
