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1、Chapter 16 General Equilibrium and Economic Efficiency Chapter 16 Slide 2 Topics to be Discussed General Equilibrium Analysis Efficiency in Exchange Equity and Efficiency Efficiency in Production Chapter 16 Slide 3 Topics to be Discussed The Gains from Free Trade On Overview-The Efficiency of Compet
2、itive Markets Why Markets Fail Chapter 16 Slide 4 General Equilibrium Analysis Partial equilibrium analysis presumes that activity in one market is independent of other markets. Chapter 16 Slide 5 General Equilibrium Analysis General equilibrium analysis determines the prices and quantity in all mar
3、kets simultaneously and takes the feedback effect into account. Chapter 16 Slide 6 General Equilibrium Analysis A feedback effect is a price or quantity adjustment in one market caused by price and quantity adjustments in related markets. Chapter 16 Slide 7 General Equilibrium Analysis Two Interdepe
4、ndent Markets-Moving to General Equilibrium Scenario The competitive markets of: Videocassette rentals Movie theater tickets DV DM Two Interdependent Markets: Movie Tickets and Videocassette Rentals Price Number of Videos Price Number of Movie Tickets SM SV $6.00 QM QV $3.00 $6.35 QM S*M Assume the
5、government imposes a $1 tax on each movie ticket. QV DV $3.50 General Equilibrium Analysis: Increase in movie ticket prices increases demand for videos. DV DM Two Interdependent Markets: Movie Tickets and Videocassette Rentals Price Number of Videos Price Number of Movie Tickets SM SV $6.00 QM QV $3
6、.00 The Feedback effects continue. $3.58 Q*V D*V $6.35 QM D*M $6.82 Q*M S*M QV DV $3.50 DM Q”M $6.75 The increase in the price of videos increases the demand for movies. Chapter 16 Slide 10 Observation Without considering the feedback effect with general equilibrium, the impact of the tax would have
7、 been underestimated This is an important consideration for policy makers. Two Interdependent Markets: Movie Tickets and Videocassette Rentals Chapter 16 Slide 11 Questions What would be the feedback effect of a tax increase on one of two complementary goods? What are the policy implications of usin
8、g a partial equilibrium analysis compared to a general equilibrium in this scenario? Two Interdependent Markets: Movie Tickets and Videocassette Rentals Chapter 16 Slide 12 The Interdependence of International Markets Brazil and the United States export soybeans and are, therefore, interdependent. B
9、razil limited exports in the late 1960s and early 1970s. Eventually the export controls were to be removed, and Brazilian exports were expected to increase. Chapter 16 Slide 13 Partial Analysis Brazilian domestic soybean price will fall and domestic demand for soybean products would increase. The In
10、terdependence of International Markets Chapter 16 Slide 14 General Analysis In the U.S. the price of soybeans and output would increase; U.S. exports would increase and Brazilian exports would fall (even after regulations ended). The Interdependence of International Markets Chapter 16 Slide 15 Effic
11、iency in Exchange Exchange increases efficiency until no one can be made better off without making someone else worse off (Pareto efficiency). The Advantages of Trade Trade between two parties is mutually beneficial. Chapter 16 Slide 16 Efficiency in Exchange Assumptions Two consumers (countries) Tw
12、o goods Both people know each others preferences Exchanging goods involves zero transaction costs James slope is -1 UJ1 UJ2 Competitive Equilibrium 10F 0K 0J 6C 10F 6C Jamess Clothing Karens Clothing Karens Food Jamess Food C A Begin at A: Each James buys 2C and sells 2F Each James would move from U
13、j1 to Uj2, which is preferred (A to C). Begin at A: Each Karen buys 2F and sells 2C. Each Karen would move from UK1 to UK2, which is preferred (A to C). UK1 UK2 P Price Line P UJ1 UJ2 Competitive Equilibrium 10F 0K 0J 6C 10F 6C Jamess Clothing Karens Clothing Karens Food Jamess Food At the prices ch
14、osen: Quantity food demanded (Karen) equals quantity food supplied (James)-competitive equilibrium. At the prices chosen: Quantity clothing demanded (James) equals quantity clothing supplied (Karen) -competitive equilibrium. C A Chapter 16 Slide 32 Efficiency in Exchange Scenario PF and PC = 3 James
15、s MRS of clothing for food is 1/2. Karens MRS of clothing for food is 3. James will not trade. Karen will want to trade. The market is in disequilibrium. Surplus of clothing Shortage of food Chapter 16 Slide 33 Efficiency in Exchange Questions How would the market reach equilibrium? How does the out
16、come from the exchange with many people differ from the exchange between two people? Chapter 16 Slide 34 Efficiency in Exchange The Economic Efficiency of Competitive Markets It can be seen at point C (as shown on the next slide) that the allocation in a competitive equilibrium is economically efficient. Chapter 16 Slide 35 Competitive Equilibrium 10F 0K 0J 6C 10F 6C Jamess Clothing Karens Clothing Karens F
