Milgrom and Roberts (1992): Chapter 3 Economics, Organization & Management Chapter 3: Using Prices for Coordination and Motivation The Fundamental Theorem of Welfare Economics. We now turn to an analysis of markets in an economy that has many consumers and producers with varying individual objectives and many goods and services. Remarkably, a price system can sometimes solve the coordination problem. In the absence of externalities and transaction costs, self-interested behavior can lead to Pareto efficiency.

Milgrom and Roberts (1992): Chapter 3 Economics, Organization & Management But where markets do not lead to efficient outcomes, other institutions may emerge in both the private sector and the public sector to remove, avoid or mitigate whatever stumbling blocks are preventing simple markets from achieving efficiency. Therefore, we look for market frictions to explain non-market economic organization.

Milgrom and Roberts (1992): Chapter 3 Economics, Organization & Management Market Frictions: Market power over price; Economies of Scale; Externalities (positive or negative); Incomplete markets (e.g., for insurance); and Search costs to match buyers and suppliers