Prices, Efficiency, and Macroeconomics
Prices, Efficiency, and Macroeconomics
This chapter describes two of the three most influential findings macroeconomics has available to it. One is known as the First Fundamental Theorem of Welfare Economics, or the “invisible-hand” theorem. It tells us that under some conditions, competitive market outcomes deliver stable non-wasteful outcomes. This result holds even if consumers care only about the goods and services they consume, and know nothing about the others, or the world, beyond the prices they face. Next, the chapter describes work showing that in general, there will be prices that, all by themselves, can guide self-interested buyers and sellers to such orderly outcomes. But who cares that this can happen? In practice, will it? To answer this, we discuss some reasons to believe in the relevance of Walrasian Equilibrium for the real-world.
Keywords: First Welfare Theorem, Myerson-Satterthwaite Theorem, Equivalence Principle, Nash Equilibrium, Noncooperative Foundations, Experiments
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