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The Third Theorem of Welfare Economics: Report from a Fictional Field Study

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  • Nyborg, Karine

    (University of Oslo)

Abstract

The perfectly competitive market – a hypothetical situation free of market failure – is the basis for the two fundamental welfare theorems, and an important benchmark for economic theory. The radical abstractions of this idea, however, make its full implications hard to grasp. I address this using literary fiction. Part I discusses fiction as a tool for economic theory. Part II is a story about a journey to the perfectly competitive market. Part III develops main theoretical insights based on the story: First, complete social isolation is needed to preclude market failure. Second, the requirements of symmetric information and no external effects are extremely hard to reconcile, leading to an impossibility theorem: if trade is permitted anytime, and deliberate, welfare-relevant learning is feasible, no perfectly competitive market can exist.

Suggested Citation

  • Nyborg, Karine, 2019. "The Third Theorem of Welfare Economics: Report from a Fictional Field Study," IZA Discussion Papers 12269, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12269
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    References listed on IDEAS

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    Cited by:

    1. Gianluca Grimalda & Alain Trannoy & Fernando Filgueira & Karl Ove Moene, 2020. "Egalitarian redistribution in the era of hyper-globalization," Review of Social Economy, Taylor & Francis Journals, vol. 78(2), pages 151-184, April.
    2. Karine Nyborg, 2020. "No Man is an Island: Social Coordination and the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(1), pages 177-193, May.

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    More about this item

    Keywords

    perfect competition; narratives; social interaction; symmetric information; complete contracts; labor markets;
    All these keywords.

    JEL classification:

    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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