Market Failure and Mercantifer Success

Market leads to outcomes which combine the highest possible utility for demanders and maximum profit for suppliers at the lowest possible resource cost. Market, therefore, achieves outcomes which are economically efficient — a notion which has been defined in a number of ways.1 However, this happens only under strict conditions (Debreu, 1959/1971).2 Mecuro and Medema (2006) summarise the conditions for Market efficiency as follows: Marginal Social Benefit = Marginal Private Benefit: The benefit to society of an additional private transaction is the same as the private benefit that the transactor enjoys; that is, there are no consumption externalities.3 Marginal Private Benefit = Price: The benefit arising from the last unit worth purchasing is the same as Market price; each demander maximises her own utility without reference to any other person and prices can be obtained for all commodities at all times. Price = Marginal Private Cost: price is equal to the private cost to producers of making the last unit worth producing; although firms maximise their profit there is no monopoly profit, market power does not exist and there are no impediments to entry to, or exit from, the industry. Marginal Private Cost = Marginal Social Cost: There is no difference between the social and private costs of producing the last unit worth producing; there are no externalities in production and no economies of scale or scope. Information: Demanders and suppliers enjoy essentially similar information about the nature, costs and impacts of things, actions and ideas on offer; there is no uncertainty. Property Rights: Demanders and suppliers are able to enjoy the full fruits of the property rights that are traded; property rights are unambiguous, enforced, alienable and enforceable.