(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 626

CHAPTER 16 • General Equilibrium and Economic Efficiency 601

1400
DAX
1200

1000
S&P
Index

800

600

400
FTSE

200

0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

F IGURE 16.3

STOCK PRICES IN THE UNITED STATES AND EUROPE
Three stock market indices—the S&P 500 in the United States, the FTSE in the United Kingdom, and the DAX in Germany—are plotted together, scaled so that each
starts at 100 in 1984. The indices tend to move together, increasing and decreasing
at about the same time.
Data from www.worldbank.org

Economic Efficiency

In Chapter 9 we saw that a competitive market is economically efficient
because it maximizes aggregate consumer and producer surplus. This is
what we normally mean when we use the term economic efficiency. But, how
does this important concept of economic efficiency apply when we take
into account the interrelationship of markets, whether open to free trade
or restricted, whether market-oriented or planned, and whether highly
regulated or not? Fortunately, there is a concept of economic efficiency that
applies when there is no market at all, but instead people simply trade with
each other. The rest of this chapter and, to some extent the remaining chapters in the book, address these questions about economic efficiency and evaluate their implications.
The analysis that follows is somewhat more complex than what has gone
before; we are now focusing on the interplay of multiple markets with multiple entities competing against each other or trading with each other. Moreover,
there are important equity implications that flow from the workings of competitive markets in general equilibrium, and we need to consider those equity
issues. To avoid losing many of our readers along the way, our strategy is to
build the theoretical analysis slowly and step by step.