ECON 208 Lecture Notes - Lecture 9: Allocative Efficiency, Imperfect Competition, Market Failure

• School: McGill University
• Department: Economics
• Course: ECON 208
• Professor: El- Attar Mayssun

Document Summary

The operative choice is between which mix of markets and government intervention best suits people"s hopes and needs. When governments monopoly of violence is secure and functions with restrictions against its arbitrary use, citizens can safely carry on their ordinary economic and social activities. The formal case for free markets is based on the concept of allocative efficiency. If all markets were perfectly competitive, and if governments allowed all prices to be determined by demand and supply, then price would equal marginal cost for all products and the economy would be allocatively efficient. Allocative efficiency means that resources are used in such a way that total surplus to society is maximized. Innovation and growth: firms in free markets innovate because they get to keep the rewards, similar motives gives individuals an incentive to invest in human capital. Decentralization of power: market systems have less centralized power in their planned economies (probably less scope for corruption)