1. Efficiency of Markets
Market: It is a decentralized collection of buyers and sellers whose interactions determine the allocation of a good or set of goods through exchange.
Points to note
1. Market is an institution for allocating goods and services from producers/sellers to buyers.
2. Market is based on the exchange of payment for goods and services
3. Market is decentralized. This distinguishes markets from auctions and centralized economies where a planner determines what to produce and how many etc.
Two main agents operates in a market:
Buyers and sellers.

2. Efficiency of Markets
Buyers / consumers belong to the demand side of the market.
Suppliers or producers belong to the supply side of the market. equation.
The law of demand and supply describe the behavior of consumers and producers respectively on the market.
The law of demand postulates that as price falls, consumers buy more of that good, all other things being equal.
In price and quantity space, the law of demand generates a downward sloping demand curve.

3. Efficiency of Markets
The demand curve summarizes how much buyers in aggregate will buy at a given market price, holding all other factors constant.
At each quantity, the demand curve summarizes what buyers are willing to pay for one more unit of a good, given how much they have consumed already.
The law of supply says that as price increases, producers will be willing to supply more of that good, all other things being equal.
At higher prices, existing producers can expand their output and new producers who could not afford to produce earlier can now produce.
The law of supply in price-quantity space generates an upward sloping supply curve
The supply curve of a good summarizes how much of a good sellers are willing to supply at a given price.

4. Market Equilibrium

5. Market Equilibrium
Market equilibrium is the combination of quantity and price at which demand equals supply.
At equilibrium, price is stable.
Shortages lead to a upward pressure on market price
Surplus puts a downward pressure on price.

6. Efficiency of Markets
Competitive markets generates prices that maximize consumer surplus and producer surplus.
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay for a good
Producer surplus is the difference between what a producer would be willing to accept to produce a good and what they actually get from the market.
We defined the demand curve as summarizing what consumers are willing to pay at each quantity = MB of a good.
The supply curve traces the marginal cost as well.
The equilibrium market outcome corresponds to the equimarginal rule.
Competitive market outcomes are economically efficient.

8. Efficient Markets
Market efficiency are not guaranteed. For markets to be efficient, the following conditions must be met.
Markets must be competitive.
Buyers and Sellers must have equal information about the good/service. Eg market for used cars (lemons)
Markets must be complete. Markets must capture all the benefits and costs involved in every transaction.

9. Case Example: The Ogallala Aquifer

10. Open Access problem
It underlies about square miles in the great plains.
Contains 3.8 billion acre-feet of water and provides 30% of all groundwater used for irrigation in the US.
It is being estimated the waters value ranges between 30 and 60% of the irrigated farmlands sale price in the region.
It is seen as an open access resource to farmers in the region.
Unlimited quantity can be extracted by individuals; the only cost is the cost of pumping.
Farmers do not account for the marginal user cost; the marginal cost of the aquifer depletion.
Because of this, the rate of extraction is estimated to be at least ten times its recharge rate.
The aquifer would soon be depleted