3.3 — The Static Benefits of Markets: Welfare Economics & Market Failure — Class Content

Wednesday, April 13, 2022

Overview

Today we consider how markets work and why (and when) they are so efficient at allocating resources and solving social problems. We take a crack at defining efficiency in a few ways: allocative, productive, Pareto, and Kaldor-Hicks efficiency. We then discuss Welfare Economics and I summarize three conditions about when markets are good & efficient: 1. Markets are competitive 2. Markets reach equilibrium 3. Markets do not have externalities

This leads us into a discussion of market failure, when markets aren’t efficient because something prevents the price system from working properly. We talk about several types of market failures: collective action problems, public goods, and externalities.

Readings

  • Ch. 14.2-14.7, Ch. 16 in @textbook

Your textbook does cover efficiency and welfare economics in Chapter 14, in the context of general equilibrium theory, which is a bit too advanced for us to spend sufficient time to cover. Thus, I would not recommend reading that chapter unless you are prepared to dive into new tools (Edgeworth diagrams, production possibilities frontiers) that I will not cover in this course.

Chapter 16, however, is a pretty accessible discussion of externalities and public goods.

The following Wikipedia entries can also provide more background on today’s concepts (which are well known and standard among economists):

Slides

Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. Note while in going through the slides, you can type h to see a special list of viewing options, and type o for an outline view of all the slides.

The lower button will allow you to download a PDF version of the slides. I suggest printing the slides beforehand and using them to take additional notes in class (not everything is in the slides)!

3.3-slides

Download as PDF


  1. Elinor Ostrom was the first woman to win an Economics Nobel prize. She was famous for her work in studying how good rules can prevent a tragedy of the commons for all sorts of common resources such as fisheries, forests, water, and other environmental resources.↩︎

Previous
Next