ECON 104 Lecture 10: Chapter 10

• School: Simon Fraser University
• Department: Economics
• Course: ECON 104
• Professor: Ingrid L.Stefanovic

Document Summary

Recall the last condition in the first fundamental theorem of welfare economics: perfect information implies that everyone knows every price, and every actor knows everything about the commodity being traded. This is not a description of the real world . There are numerous things we do not know. (cid:120) (cid:120) This is hard for government to solve via regulation. The government cannot fix this with financing or taxing. Let us consider this in terms of our model, with marginal reasoning: Recall that in a market with perfect information, the demand reflects the marginal value, Now suppose i think that the marginal value of a good is mvg ( marginal value guessed ) that differs from the true marginal value mv, i. e. , mvg mv. Along my demand, mvg = price, and in the market equilibrium mvg = price = marginal. We know that the condition to be satisfied for efficiency is mv = marginal cost, not.