1: Market failure as rational for state intervention

Question 1

What are the assumptions of general equilibrium theory?

Answer 1

1. individuals have preferences and endowments
2. independent decisionmaking
3. perfect cmpetition

Question 2

What is the first welfare theorem of general equilibrium theory?

Answer 2

Market equilibrium achives a pareto optimal distribution of private goods

Question 3

What is the second welfare theorem of general equilibrium theory?

Answer 3

Any pareto optimal allocation of private goods can be achieved as market equilibrium by making ‘lump sum transfers’

Question 4

What are the limits to general equilibrium theory?

Answer 4

• public goods
• externalities
• asymmetric information
• market power

Question 5

What is the COASE THEOREM for general equilibrium theory?

Answer 5

If negotiation and enforcement have no cost, private voluntary contracts reach an efficient outcome even for public goods and considering externalities