Question

Typical situations in which equilibrium is not efficient include: (select all relevant) markets are not competitive firms are profit maximizers there are externalities some of the produced goods (e.g., innovative ideas or pollution) are not traded on the markets policies / regulations apply to some, but not all, consumers / producers policies are action-dependent the good quality is not fully known to consumers the workers' effort is not perfectly observed by the employers firms do not care about consumers' utility consumers do not care about the firms' profit

Answer 1

1. markets are not competitive - equilibrium is not efficient. If markets are not competitive then demand price is not equal to supply price and hence equilibriumis not achieved.

2. firms are profit maximizers - equilibrium is efficient - In short run, equilibrium is attained if MC= MR, firms are profit maximizaers.

3. When there are externalities - equilibrium is not efficient - as there is market failure on account of externalitieties

4. some of the produced goods (e.g., innovative ideas or pollution) are not traded on the markets - equilibrium is efficient as weare considering some products and hence may not outweigh the effect of goods that are traded.

5. policies / regulations apply to some, but not all - equilibrium is efficient. Again, going with the reasoning in 4. Policies applyring to some is not enough to achieve a full state of non-equilibrium.

6. consumers / producers policies are action-dependent - equilibrium is not efficient. In extreme cases consumers/producers may ask/charge a price and drive the equilibrium to a non-attainable state.

7. the good quality is not fully known to consumers - equilibrium is not efficient - asymmetric information is present.

8. the workers' effort is not perfectly observed by the employers - equilbrium is not efficient - asymmetric information is present.

9. firms do not care about consumers' utility - equilibrium is not efficient. Example would include Walrasian economy, hedonic markets etc.

10. consumers do not care about the firms' profit - equilibrium is not efficient as they will ask for price which will make the equilibrium non-attainable.