(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 620

C H A P T E R

16

General Equilibrium
and Economic Efficiency
CHAPTER OUTLINE
16.1 General Equilibrium Analysis
595

16.2 Efficiency in Exchange
602

F

or the most part, we have studied individual markets in isolation.
But markets are often interdependent: Conditions in one can
affect prices and outputs in others either because one good is an
input to the production of another good or because two goods are substitutes or complements. In this chapter, we see how a general equilibrium analysis can be used to take these interrelationships into account.
We also expand the concept of economic efficiency that we introduced in Chapter 9, and we discuss the benefits of a competitive market economy. To do this, we first analyze economic efficiency, beginning with the exchange of goods among people or countries. We then
use this analysis of exchange to discuss whether the outcomes generated by an economy are equitable. To the extent that these outcomes
are deemed inequitable, government can help redistribute income.
We then go on to describe the conditions that an economy must satisfy if it is to produce and distribute goods efficiently. We explain why
a perfectly competitive market system satisfies those conditions. We
also show why free international trade can expand the production possibilities of a country and make its consumers better off. Most markets,
however, are not perfectly competitive, and many deviate substantially from that ideal. In the final section of the chapter (as a preview
to our detailed discussion of market failure in Chapters 17 and 18), we
discuss some key reasons why markets may fail to work efficiently.

16.1 General Equilibrium Analysis
So far, our discussions of market behavior have been largely based

on partial equilibrium analysis. When determining the equilibrium
prices and quantities in a market using partial equilibrium analysis,
we presume that activity in one market has little or no effect on other
markets. For example, in Chapters 2 and 9, we presumed that the
wheat market was largely independent of the markets for related
products, such as corn and soybeans.

16.3 Equity and Efficiency
610

16.4 Efficiency in Production
613

16.5 The Gains from Free Trade
618

16.6 An Overview—The Efficiency
of Competitive Markets
623

16.7 Why Markets Fail
625

LIST OF EXAMPLES
16.1 The Global Market for
Ethanol
598

16.2 “Contagion” across Stock
Markets around the World

600

16.3 Trading Tasks and iPod
Production
621

16.4 The Costs and Benefits of
Special Protection
622

16.5 Inefficiency in the Health
Care System
626

595