Mark Popescu wrote:
There's no such thing as "efficient level", except in the tautology "the market outcome is always efficient".
There is more to it than a tautology. Ignoring market failures (such things as public goods and externalities), markets are efficient in the sense that they produce a Pareto optimal outcome. Pareto optimality is a state in which you can't make everyone better off by rearranging who has what; you have to make at least one person worse off if you benefit anyone else. A Pareto nonoptimal state, which is what you get with public goods, is a condition where you could redistribute wealth and resources and make every person happier or at least no less happy. In the case of, say, recorded music as a public good, the market will not produce enough music relative to a Pareto optimal state. Some people would be willing to pay for more music, and this money would be more than enough to pay musicians to produce that music. So there is a redistribution which would make many people happier without making anyone less happy. But this redistribution won't happen, under market conditions. There is no mechanism to force people to pay when everyone can get music for free. And people are not willing to make sufficiently large voluntary contributions to fund the musicians because they know others are going to benefit just as much without paying a dime (the free rider problem). Detailed analysis supports the conclusion that, in general, markets under-provide public goods relative to a Pareto optimal outcome. Therefore it is clear that it is quite meaningful to investigate whether markets produce efficient or non-efficient outcomes in various situations. There is no tautology involved.
On Wed, 3 Jul 2002, Anonymous wrote:
Ignoring market failures (such things as public goods and externalities), markets are efficient in the sense that they produce a Pareto optimal outcome.
Even if you neglect market failures in the usual sense, an outcome such as everybody becoming a slave to a single individual is Pareto efficient -- you can't dissolve the situation without hurting the slave owner. Pareto efficiency talks about allocation, not distribution, and so the latter can be arbitrarily skewed in a Pareto efficient economy. Even to the point of apparent absurdity. It's a different thing altogether, then, whether you can approach such a dismal state of affairs via Pareto moves...
A Pareto nonoptimal state, which is what you get with public goods, is a condition where you could redistribute wealth and resources and make every person happier or at least no less happy.
I don't think so. Instead I'd say that is Marshall efficiency in the absence of transaction costs. The trouble is, you can never make everybody happier by redistributing since someone will have to pay the cost. (Here we of course assume that everybody wants more of everything.)
So there is a redistribution which would make many people happier without making anyone less happy.
More to the point, there is a redistribution which would allow the total amount voluntarily paid by a large number of people exceed the amount a minority is ready to pay to avert the cost of the redistribution. (Nowadays I'm thinking this isn't bad in itself, but that amplification of this sort of pattern via returns to scale is.)
Therefore it is clear that it is quite meaningful to investigate whether markets produce efficient or non-efficient outcomes in various situations. There is no tautology involved.
Quite. But on the other hand, public goods reasoning is also a very, very dangerous thing. Consumption side externalities are my personal favorite. Suppose there is a considerable personal benefit to rich people in seeing the average bum spend his money in something respectable instead of liquor. In this case, liquor consumption has a visible externality, and optimal provision calls for institutions which more or less tax the rich and use the proceeds to encourage the bum to straighten up. Now, that doesn't sound *too* bad in itself, but when you apply the same reasoning to the educational needs of the young and the societal benefits one would expect of a highly educated younger generation... Sampo Syreeni, aka decoy - mailto:decoy@iki.fi, tel:+358-50-5756111 student/math+cs/helsinki university, http://www.iki.fi/~decoy/front openpgp: 050985C2/025E D175 ABE5 027C 9494 EEB0 E090 8BA9 0509 85C2
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