Lecture 14 Auction Market Explained

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Lecture 14 - Auction Market Explained

• Wissinks Words

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remarks

• The Double Oral Auction Market Results are
  explained.
• Prof. Abowd used basic information about the
  buyers and sellers to construct a theoretical
  model of demand and supply which allowed him to
  very accurately predict the market price.

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market performance

• Market performance criteria
• efficiency
• equity
• Economists analyze the efficiency consequences of
  economic systems using a concept called Pareto
  Efficiency.
• Dealing with equity issues is challenging.

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efficiency

• A market allocation is Pareto Efficient (P.E.) if
  no participant in the market can be made better
  off without making at least one other participant
  worse off.
• Pareto Efficiency allocative efficiency.
• Gains from trade are maximized.
• Net social surplus is maximized.
• Marginal benefit equals marginal cost.

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are markets efficient?

• Pareto Efficiency requires MBMC.
• From demand theory PMB for each unit
• From supply theory supply reflects MC of each
  unit
• In equilibrium DemandSupply soPMC at
  X soMBMC at X sowe have allocative
  efficiency at X!
• Important result.

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the first fundamental theorem of welfare
economics

• Economists state (and prove) this efficiency
  result in what is called the first fundamental
  theorem of welfare economics.
• If there is a market for every good, and if all
  markets are competitive (buyers and sellers are
  price takers), then the competitive equilibrium
  is Pareto Efficient (also called Pareto
  Optimal).

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the second fundamental theorem of welfare
economics

• Economists have also established a second
  property of competitive markets, called the
  second fundamental theorem of welfare
  economics.
• Any Pareto Efficient outcome can be achieved as a
  competitive equilibrium provided that all
  redistributions are accomplished by lump-sum
  transfers of wealth.

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final note

• Think about when the market works and when the
  market does not work when it fails (either on
  efficiency and/or equity grounds).
• Use the 1st and 2nd fundamental theorems to start
  and shape this discussion.
• Such questions lead to many interesting policy
  debates.