Review of Results from Double Auctions 20 different markets 10 buyers and 10 sellers in each market – the 5 buyers and 5 sellers on page plus their clones –Prediction: P = $13 and Q = 26 –results were very close to prediction For $6 increase in MC, the equilibrium price P = $16 and equilibrium Q = 20

Properties of Competitive Markets One price in the market which is the equilibrium price P Each firm produces a quantity such that MC equals the equilibrium price P –Hugo, Mimi,... Each consumer buys a quantity such that MB equals the equilibrium price P –Maria, Ken,...

Are Competitive Markets Efficient Definition (need to be careful) Pareto efficiency: –a situation where it is impossible to make one person better off without hurting another person

Conditions for Pareto Efficiency marginal benefit equals marginal cost (for last item produced) marginal cost of each good should be the same for all producers marginal benefit of each good should be the same for all consumers

Are the conditions satisfied for a competitive market? Check ‘em –first: MC = MB because equilibrium occurs at the intersection of the demand (MB) curve and the supply (MC) curve –second: MB = P for each consumer, because each consumer sets MB = P and because there is a single equilibrium price P in the market equilibrium –third: MC = P for each firm, because each firm sets MC = P and because there is a single equilibrium price P in market equilibrium

Answer: YES! ALL THREE CONDITIONS ARE SATISFIED

We can measure how well the market works: Use producer and consumer surplus in an equilibrium of a competitive market the sum of producer surplus and consumer surplus is as large as possible OR, the marginal benefit less the marginal cost of all items produced is as large as possible Or, Deadweight Loss is eliminated

Deadweight Loss from a Tax A tax on firms raises the marginal cost for each firm Supply curve shifts up by the amount of the tax Quantity produced falls Price rises, but by less than the tax Deadweight loss is created