We are taught that under the condition of perfect competition,

August 15th, 2017

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In Module 3 we are introduced to the concept of welfare economics, where we learn to judge economic outcomes by their impact on efficiency. We are taught that under the condition of perfect competition, with many buyers and sellers free to use their resources as they best see fit,

society’s economic welfare will be maximized. Another way to say this is that unfettered competitive markets produce outcomes that are Pareto optimal. According to this Pareto optimal concept, If there is some way to reallocate resources to make at least one person in this market better off without hurting others, then the said outcome is not efficient.

It is only efficient when we have exhausted every resource to its fullest potential (most valued use) in such a way that the only way to make someone better off is to make someone else worse off.

In his writings Adam Smith suggested that markets do much more than simply allocate resources efficiently.

According to Smith, markets provide the structure so that self-interested behavior creates a just and moral society. Marx felt differently about markets, suggesting that markets cause divisions in society and that capitalism itself would create the seeds of its own destruction. Still others believe that a society first much be morally grounded and practice trust, reciprocity, and relationship before markets can thrive. It seems that the link between markets and morality,

or between markets the welfare, is much more complex than orthodox economics suggests.

For this essay, I’d like you to critically consider the links between markets, efficiency, morality and equality. What are the conditions under which markets maximize social wellbeing? What metrics can/should we use to measure social well-being? Under what conditions do interventions and/or limits on markets increase society’s welfare?

When would it make sense to rely on markets to allocate resources efficiently and then deal with the equity issues separately? When does it make sense to shape the market in a way to produce more equitable outcomes? What do we gain/lose by focusing on efficiency and optimal allocation? What do we gain/lose by focusing on equity? Are markets generally good, bad, or are they inert?

The Resources for this Essay: