12/11/2011

Perfect market and the "World of Truth"

In a free market, people don't buy things that are worth less to them than the asking price. And people don't sell things that are worth more to them than the asking price.
The value of the product to the customer is equal to or higher than the price; and the cost to the producer equal to or lower than the price.

In a perfectly competitive market, the price of coffee would equal the marginal cost of the coffee. If the price were lower, firms would go out of business until it rose. If the price were higher, new firms would enter or old firms would expand their output until it fell.

Interest rates are just another price: the price of spending today instead of future.

In a perfectly competitive market, companies are producing the right things in right way in the right proportion and productions are given to the right people.

In nonmarket system, the truth about values, costs, and benefits has disappeared.

When economists say the economy is inefficient, they mean that there's a way to make somebody better off without harming anybody else.

Taxes are inefficient because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no loner equals value.


All efficient outcomes can be achieved using a competitive market, by adjusting the starting position. Instead of interfering with the markets themselves, the trick is to adjust the starting blocks by making lump-sum payments and levying one-time taxes.

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