Question Description
In Mankiw Chapter 7 we explored the concepts of consumer surplus and producer surplus, and then used these concepts to evaluate the “efficiency” of free market outcomes. Thereby, we concluded that the equilibrium price and quantity to which buyers and sellers are led by the “invisible hand” of market forces, maximizes the total benefits to buyers and sellers.
Read the article, “Why the Efficiency of The Free Market is a Myth” by Matthew Hutchinson (accessible under Articles in the Bb menu). Hutchinson argues that “…the concept of market efficiency is nothing more than an a priori assumption,…a self-fulfilling prophecy…not a falsifiable assumption”.
Address these questions:
a) Is Hutchinson correct in his disputation with the concept of market “efficiency”? Why/Why not?
b) Hutchinson questions the concept of consumer “willingness to buy”. Is his definition of “willingness to buy” and its utility as an analytical tool in accord with Mankiw’s definition and analytical use to determine consumer surplus? How important is observational data to this question?
c) Hutchinson proposes an alternative definition of efficiency, wherein the “value” of a good is a product of the labor and materials used to manufacture the good. Does this make sense and does it help to evaluate the efficiency of market outcomes? Explain your reasoning. Are you aware of any historical precedents for this concept of “value”?
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