12/06/2009

Free Enterprise theory

The conditions for a market/economy to be a Free Enterprise Economy that can be proven to be "Efficient" are:
  1. There are many competing suppliers (consumers) such that none of them can effectively individually, or do conspire to set prices in the market.
  2. There are no Economies of Scale, e.g. the Incremental cost of production does not decrease as the number produced increases. (I think that it must also be assumed that there are no Economies of Consumption e.g. that the value to the consumer for additional units consumed also does not increase as the number consumed increases [Q.1: Economies of Scale and interdependance])
If a market satisfies these conditions then it can be proven, the General Equiblirum Theory, that the market is efficient, as defined as follows, that (page 50):
  1. Market clearing prices exist, one for each product.
  2. Supply and Demand will be equal at these prices, i.e.,
  3. Resources will be fully used.
  4. Inputs will be used in the most productive way, e.g. there is no way to produce more by re-arranging the inputs, [Q.2: what is more]
  5. The result are Pareto-efficient, i.e. it is not possible to improve anyone's situation except by degrading another's (or by obtaining more researces) e.g. [Q.3: Pareto-Efficient:] (page 54)
Note 1: The term "Free Enterprise"
(markets) will often be used as a synonym for:
  • Competitive Economy
  • Lessez-faire
  • Capitalism

Note 2: I am not really sure what the exact assumptions for the Free enterprise system are. e.g. I don't see the mathemetical model.
  1. What is the original wealth of individuals? (if it matters)
  2. How do individual's wages get determined?
  3. How do individual's values get determined? (though this may be irrelevant)
  4. Re: 2, is is required that the Demand:Value curves are decreasing and Supply and Demand curves are all fixed and independant?

Note 3: Though it may be 'efficient'
there are a number of other possible problems:



Question:
  • Q.1: Economies of Scale and interdependance: Do the conclusions depend on there being no economies of scale for consumption, e.g. that the utility of consuming decreases as more is consumed, and does it depend on their being no cross value, e.g. that each product's worth or cost is independent of any other product. e.g. Gas is worth $2.00/gal whether or not one has a car?
  • Q.2: What is more: Is this 'more' as valued by the Quantity*Clearing_Price, or is this a Pareto more, e.g. No more except at the cost of Less?
  • Q.3: Pareto-Efficient: Is it even true that Pareto-efficiency exists based on the studies in Behavioral Economy that seem to indicate that increasing the Richness of the Wealthy, even if there is not reduction in the Poorer, decrease the happyness of the poorer.

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