ch. 3 Stone Efficiency

How do different ideologies view markets?

Proponents of free markets view that markets should be free from government Liberalism, social democracy etc think that unrestrained markets lead to dangerous concentrations of power and wealth and governments must manage it

What does evidence reveal regarding the equality-efficiency trade-off?

- OCED data does not support that there is a trade off. More unequal countries have hindered growth - Stone makes an argument that more equality as a result of government policies -> economic growth is a more efficient mechanism to reduce poverty

Challenges to the market model

1. Markets do not explain our behavior as social creatures who have feelings 2. our welfare is not independent of each others' 3. free market ignores distribution (even though on the numbers like growth rates 2 countries may seem the same)

What assumptions does market theory rest upon? How do these differ from the "real world"?

1. rationality: that people are rational and self-interested flaw: people do not always make decisions that are in their best interests as they themselves define them (e.g. smoking) 2. buyers and sellers share the same full information 3. people engage in trade voluntarily flaw: most people work to get by; laid-off folks get a new job that pays less not because they want them 4. externalities can be corrected by forcing peopel to take the consequences for the harm that they create on others 5. government action is permitted in governing public goods flow: community cannot be produced by market, markets can perpetuate discrimination, allow people to act on their prejudices

How can competition produce undesired effects (think about health insurance markets)?

Insurance companies can create plans that are very cheap but have very poor coverage

Why is efficiency not a worthy goal in itself?

It is not a specific benchmark to reach; rather, it is a way in which we judge the merits of different ways of getting things done. It is not a worthy goal in itself because deprived of the context of the operation efficiency may not mean the best for each player.

What does Stone's discussion of public libraries tell us about defining efficiency?

It means using a limited budget to allocate resources and money in a way that can maximize output- i.e. circulation Depending on who the parter is, their definition of efficiency differs (e.g. Town budget officials see local branches as inefficient vs borrowers think they are efficient)

How is social welfare defined in a market?

Social welfare is the grand total of all individual well-being added together When the market is efficient and everyone is better off

Why is one person's efficiency another person's waste?

Sometimes, costs can simultaneously be benefits to someone else. For example, carbon emissions are bad for the residents next to the coal factory, but the factory benefits from increased revenue

What is the basic definition of efficiency? Why is it always a comparative notion?

The basic definition is of efficiency is getting the most output for a given input. It is always a comparative notion because it is a criterion for judging goodness, applied to many things, and is dependent on context and interpretation. Therefore, each interest describes a different efficiency.

What defines a market? What are the basic characteristics of market exchanges?

networks of exchanges where people come together to swap goods or trade goods for money In a market, there is always one person who is better off than the other characteristics: (1) exchanges are voluntary (2) people make their voluntary exchanges on the basis of (1) objective information about the price and quality of all alternative available for trade and (2) subjective info about their needs, desires, etc