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This lecture is from Economics of Environmental Resources. Key important points are: Efficiency in Consumption, Consumer Sovereignty, Each Efficient Point, Distribution of Income, Price Ratio, Efficiency in Production, Size of Consumption Box, Production Contract, Distribution of Income, Change Endowments
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oscar whwool
sam MRS (^) wh , wool = MRS ,
A competitive market leads automatically to an efficient distribution of consumer goods among consumers
Why:
Market yields a price that is the same to all
S
D
$
P
Q
oscar
sam
2
Efficiency in Production
P land
Plabor
Wool Pland Labor,Land
Wheat Plabor MRTSLabor, (^) Land= =MRTS
Consumption Box smaller than need be)
on production contract curve we are)
⇒ ⇒
Contract curve point as well as inputs possessed by society i.e. depends on initial endowments and property rights)
rights (^) ⇒ change efficient outcomes
4
The Invisible Hand
…and by directing industry in such a manner as its produce may be of the greatest value, he intends only his own gain and he is in this, as in many other cases, led by an invisible hand to promote and end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.
Adam Smith, The Wealth of Nations, 1776
But…
⇒
