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2 PRIVATE GOODS, MARKET MECHANISM AND PARETO EFFICIENCY

Explore the economic consequences of resource scarcity, efficiency in resource usage, and the concept of Pareto efficiency. Learn about alternative allocation mechanisms, the Paretian and Hicks-Kaldor criteria for social improvement, and whether the market mechanism can reach Pareto efficiency. Understand the role of government intervention and market imperfections in resource allocation.

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2 PRIVATE GOODS, MARKET MECHANISM AND PARETO EFFICIENCY

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  1. 2PRIVATE GOODS, MARKET MECHANISM AND PARETO EFFICIENCY

  2. 2.1.Scarcity, Efficiency and Social Welfare (1) • Economic Consequence of Resource Scarcity • Efficiency in usage  society’s welfare • The most efficient use  the Maximum level of society’s welfare

  3. 2.1.Scarcity, Efficiency and Social Welfare(2) • Alternative Mechanisms for Allocation of Resources • Market  Relative price of goods • Government public policies

  4. 2.2. The Concept of Pareto Efficiency • The Concept “an allocation of resources is only efficient …if it is only impossible to make anyone better off without making someone else worse off ”

  5. 2.3. Paretian Criteria for Social Improvement • The Paretian criterion for social improvement: “a social reform increases welfare provided at least one individual is made better off and none are made worse off” • Condition for having ‘paretian improvement’  conservative

  6. 2.4. Hicks-Kaldor Criteria for Social Improvement • The Hicks-Kaldor criterion for social improvement: “an economic reform is a social improvement if those gaining from it can compensate losers and remain better off than before change” • Not actual compensation, rather ability to compensate the losers from the potential gain

  7. 2.5. Can Market Mechanism Reach Pareto Efficiency? (1) • Market can realize pareto efficiency only when: • Efficient in production • Efficient in exchange • Efficient in ‘product-mix’ • These can be satisfied by market only when it is perfectly competitive market

  8. 2.5. Can Market Mechanism Reach Pareto Efficiency (2)? • However, the perfectly competitive market has a set of rigid assumptions : • Perfect and costless information • Market actors are numerous and each is individually very small • Products are totally identical • No barriers to entry and exit from the market

  9. 2.5. Can Market Mechanism Reach Pareto Efficiency (3) • If the market can meet all these assumptions, allocation of resource through market mechanism will result in ‘Pareto Efficiency’. • Hence, no needs for government intervention in resource allocation anti government intervention on market

  10. 2.5. Can Market Mechanism Reach Pareto Efficiency (4) • But, if one or more of them cannot be met, allocation of resource through the market will not result ‘Pareto efficiency’. • Hence, government intervention becomes desirable to improve efficiency in resource allocation  ‘Social Improvement’

  11. 2.5. Market Imperfection as Another Reason for Government Intervention • In reality, the set of assumptions underlying perfectly competitive market never be met. • Market tends to be imperfect  Monopoly, oligopoly etc • So, scope for government intervention in resource allocation is always present in the economy

  12. 2.6. Readings Stiglitz, Joseph E. 2000. “Economics of the Public Sector”. New York: W.W. Norton and Company. Bab 3 Weimer, David L. and Vinning, Aidan R. 1992. Policy Analysis: Concepts and Practices. New Jersey: Prentice Hall. Chapters 3,4,5.

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