6/23/2011

Free Enterprise market

Free Enterprise market 

Much of economics is based on the assumption that the systems that they are analyzing are a coordinated set of "Free Enterprise Markets" with entities who are guided by "Rational Actor Theory". This entry attempts to clarify my thoughts about the Assumptions and Conclusions of this situation.


Free Enterprise market. (competitive model),
  • [T]he flows of services that would be offered and purchased and the prices that would be paid for them if each individual in the market offered or purchased services at the going prices as if his decisions had no influence over them, and
  • [T]he going prices were such that the amounts of services which were available equalled the total amounts which other individuals were willing to purchase, with no imposed restrictions on supply or demand.

Rational Actor

Results.

First Optimality Theorem:
  • If a competitive equilibrium exists at all, and if all commodities relevant to costs or utilities are in fact priced in the market, then the equilibrium is necessarily [Pareto] optimal in the following precise sense: 'There is no other allocation of resources to services which will make all participants in the market better off'
Second Optimality Theorem:
  • If there are no increasing returns in production, and if certain other minor conditions are satisfied, then every optimal state is a competitive equilibrium corresponding to some initial distribution of purchasing power

See:

Kenneth Arrow’s seminal article on the economics of medical care (pdf)

JSTOR: Philosophy & Public Affairs, Vol. 6, No. 4 (Summer, 1977), pp. 317-344 (http://www.jstor.org/pss/2264946)

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