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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.
Suppose there are two inputs in the production function, labor (L) and capital (K), which can be combined to produce Y units of output according to the following production functio
Alice and Bob survive on hamburgers and salads. Aliceís utility function is UA = hA(sA 1) where hA and sA are her consumption of hamburgers and salads respectively. Bobís utility
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