Week 1 Reading - Hahn Flashcards

1
Q

Why is the assumption of complete markets unrealistic?

A

Markets are not complete; for example, there are often no markets for contingent claims, meaning real economies don’t match the pure theory.

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2
Q

How does market power challenge the FFTWE?

A

When firms or individuals have market power, the invisible hand falters. Prices no longer reflect true scarcity or value, and Pareto efficiency breaks down.

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3
Q

What role does information asymmetry play in undermining the theorem?

A

Agents rarely have perfect information. When some agents know more than others, prices fail to convey accurate signals, leading to inefficient market outcomes.

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4
Q

What happens when rational expectations are introduced?

A

Even with rational expectations, there are often multiple equilibria — not all of which are Pareto efficient.

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5
Q

What is the ‘no-surplus condition,’ and why does it matter?

A

It’s the idea that no agent should have influence over prices. Without this, strategic behavior emerges, deviating from the pure competitive model.

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6
Q

How does the theorem handle externalities?

A

It doesn’t. When externalities are present, prices fail to reflect true costs or benefits, causing inefficiency and necessitating government intervention.

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7
Q

What is the key philosophical flaw in relying on the FFTWE as a policy guide?

A

Achieving a Pareto-efficient allocation doesn’t mean it’s fair or just; the distribution of welfare can be wildly unequal. Efficiency ≠ equity.

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8
Q

Why does the invisible hand sometimes ‘get stuck’?

A

Market dynamics don’t guarantee equilibrium. Miscalculations, imperfect information, and strategic behavior may cause suboptimal states.

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9
Q

How does the FFTWE relate to policy-making?

A

Hahn warns against using the theorem to justify laissez-faire policies without nuance; market failures often demand government intervention to correct inefficiencies.

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10
Q

How can you critically evaluate the FFTWE in an essay?

A

Start by explaining the theorem, discuss its unrealistic assumptions, highlight Hahn’s critiques, emphasize the distinction between efficiency and equity, and argue for adjustments in real-world policy.

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