Saturday, September 20, 2008

Teaching Market Efficiency

Prof. Otake talks about the merit of market competition (Japanese only). He raises an important issue on it by taking an example of antitrust policy in Japan:

Many who make an antitrust policy in Japan are rather jurists than economists and that is thought to be why the fundamental theorem of welfare economics(the merit of market competition) has not been well understood.

The policymakers don't understand the merit of market competition and thus can't have people understand the meaning of antitrust policy and deregulation in the market economy.

Therefore, it doesn't seem that Japanese people understand that the merit of market competition is greater than the demerit of widening gap of income.

How should we explain the merit of market competition, or market efficiency?

Some people say that the value of the process of market competition should be emphasized to teach it, others that we can have the incentive to do something valuable through the market competition.

Regarding it, prof. Mankiw has "the top three economic concepts" to teach introductory economics:

1. Comparative advantage and the gains from trade.

2. Supply, demand, and the efficiency of market equilibrium.

3. Market failure, such as externalities, and the role for government.

The lesson is that we can all gain from economic interdependence and that markets are a good, but not always perfect, way to coordinate people in an interdependent world.

It might be a little difficult for us to teach market efficiency. Some people teach it by using, what is called, an Edgeworth box and contract curve, but it seems too abstract to understand how efficient and well functioning the market economy is. In contrast, others teach it by using the principle of comparative advantage like Prof. Mankiw and I like it better.

I don't think that many econ students actually understand well the efficiency and the merit of market economy. It seems to me that they just pretend to talk about it like some economists whom they always see through the Bloomberg or Reuters TV.

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