Consumers, Producers, and the Efficiency of Markets

When consumers go to grocery stores to buy their turkeys for Thanksgiving dinner, they may be disappointed that the price of turkey is as high as it is. At the same time, when farmers bring to market turkeys they have raised, they wish the price of turkey were even higher These views are not surprising Buyers always want to pay less, and sellers always want to get paid more. But is there a “right price” for turkey from the standpoint of society as a whole? In previous chapters, we saw how, in market economies, the forces of supply and demand determine the prices of goods and services and the quantities sold. So far, however, we have described the way markets allocate scarce resources without directly addressing the question of whether these market allocations are desirable. In other words, our analysis has been positive (what is) rather than normative (what should be) We know that the price of turkey adjusts to ensure that the quantity of turkey supplied equals the quantity of turkey demanded. But at this equilibrium, is the quantity of turkey produced and consumed too small, too large, or just right? In this chapter, we take up the topic of welfare economics, the study of how the allocation of resources
affects economic well-being. We begin by examining the benefits that buyers and sellers receive from taking part in a market. We then examine how society can make these benefits as large as possible. This analysis leads to a profound conclusion: The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers As you may recall from Chapter 1, one of the Ten Principles of Economics is that markets are usually a good very to organize economic activity. The study of welfare economics explains this principle more fully It also answers IUT question about the right price of turkey: The price that balances the supply and demand C r turkey 1′- -n a particular sense, the best one because it maximizes the total welfare of turkey consumers and turkey producers.

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