"To defend the truth, to articulate it with humility and conviction, and to bear witness to it in life are therefore exacting and indispensable forms of charity."

H. H. Benedict XVI. Caritas in Veritate Encyclical. June 29, 2009

Saturday, January 22, 2011

In what sense perfect competition is an optimum

The perfect competition partial equilibrium is Pareto-optimum with respect to the pre-equilibrium perfect competition. However, since the monopolist gets a better profit by being a monopolist than in perfect competition, a perfect competition partial equilibrium which starts with a pure-monopoly-then-turned-into-perfect-competition is not a Pareto-optimum. Or to put it another way, you can't use the perfect competition optimality as an argument to dismantle a monopoly. (By the way if you are trying to attack a monopoly, better use the Hayek argument on the spread of information through a free market.)

The much-trumpeted perfect competition optimality is not argument for perfect competition (whatever it is in the real world) but for not to stop the tendency through equilibrium in the particular structure of perfect competition; i. e., perfect competition optimality is a particular case of equilibrium optimality (vis-à-vis disequilibrium).

The monopolist as (necessarily) a price discriminator

The maybe most popular microeconomics book reads "we suppose that the monopolist knows the demand function for its product..." (1). This raises the question: why in the hell isn't such a monopolist a perfect discriminator? I mean, he know what prices he can charge for every marginal quantity supplied, and he doesn't do it?! Can we think about a pure monopolist not being at a time a perfect discriminator as something but a logical contradiction? Tell me a reason why such a monopolist would charge the same price to anyone knowing how much surplus he can exact from each.Yes, you can impose some institutional arrangement, but can you think of any which doesn't violate the standard Marshallian setting?

(1) Mas Colell et al. Microeconomic Theory. 1995. Page 384.

Saturday, January 8, 2011

Government failure as a market failure as no failure at all

Some people say that there are government failures rather than market failures. However, one could ask how is that a already-so-well-working market allows for a failing government to appear and grow up. Or maybe, a failing State is not but a stage in the institutional development in the way of an ever-improving market.