Case for the market - pigovian analysis, Public Economics

Case for the Market 

With  the objective of maximising total value of output  focused on  observing real  factors of production, through the  logical  'tool  of marginal product,  and the awareness of obstacles  to movement and divergences of private and  social product,  Pigou  set  about judging  how  well  a  market system performs.  He considered the market  allocation mechanism  as the default scheme and was interested in  comparing the optimal resource configuration to that yielded by the market system. 

Pigou  thought  it  a  settled matter  that  the  market system often  generated  an optimal solution and, thus, did not spend much  time or effort explaining this result. Self-interested resource owners, unhampered  by  ignorance, seeking to maximise their private returns, will allocate resources so that marginal private net products will everywhere deviate by  less than the costs of movement and, thus,  the  sum  total of returns will  attain  a maximum.  If  private  and  social products are equivalent, the free play of self-interest yields a socially optimal allocation. 

Posted Date: 10/26/2012 5:51:53 AM | Location : United States

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