The neoclassical school has two founding members WS Jevons and L. Walras, who wrote their key projects in the 1870s. The difference made by the neoclassical school in relation to the classical school is that it uses the principles of utilitarianism of the human nature in the sphere of economy. The man is a rational person looking for the maximum satisfaction of his/her needs, for getting the maximum utility by directing his/her actions towards the increase of his/her pleasure and the reduction of his/her pain. Thus, for the neo-classical economists, the consumer seeks the combination of goods that maximizes the utility derived from consumption and the producer seeks to maximize profits, while each individual chooses the combination of work and leisure that maximizes his/her satisfaction. Also, they argue that the value of goods results from the satisfaction they provide and not from the work they incorporate as the classical economists believed.
From the text:
- the market failure to achieve efficiency and justice;
- imperfect competition;
- equality of power;
- external consequences
Table of Contents
- Introduction
- The market failure to achieve efficiency and justice and the theoretical justification for state intervention
- Imperfect competition
- Why are monopolies / oligopolies considered to result in a loss of social welfare?
- Equality of power
- Market failures
- External consequences
Objectives and Key Themes
This text examines the neoclassical economic theory of welfare, exploring its justification for state intervention in the economy. It analyzes the conditions under which markets fail to achieve optimal resource allocation and equitable distribution, highlighting the role of imperfect competition, market failures (including public goods), and externalities.
- Neoclassical economic theory of welfare and its justification for state intervention.
- Market failures as a reason for government intervention.
- The role of imperfect competition (monopolies and oligopolies) in hindering efficiency and social welfare.
- The concept of public goods and their implications for market outcomes.
- Externalities and their impact on resource allocation.
Chapter Summaries
Introduction: This introductory chapter establishes the foundation of neoclassical economics, tracing its origins to Jevons and Walras and contrasting it with classical economics. It highlights the neoclassical emphasis on utilitarianism and individual rationality in economic decision-making, emphasizing the pursuit of maximum utility by consumers and profit maximization by producers. The chapter also briefly introduces the concept of market failure as the primary justification for state intervention, according to neoclassical economists, setting the stage for a deeper exploration of this concept in subsequent chapters.
The market failure to achieve efficiency and justice and the theoretical justification for state intervention: This chapter delves into the two fundamental theorems of neoclassical welfare economics. The first theorem asserts that perfect competition leads to optimal resource allocation, while the second suggests that undesirable income distribution stems from initial wealth distribution, not market mechanisms. The chapter critically examines the assumptions of perfect competition, acknowledging that real-world markets rarely achieve this ideal. Consequently, the chapter justifies government intervention as a “second-best” solution to correct market failures and deviations from Pareto optimality.
Imperfect competition: This chapter explores the concept of imperfect competition, focusing primarily on monopolies and oligopolies. It explains why these market structures lead to a loss of social welfare, as producers restrict output to raise prices, resulting in resource allocation that doesn't align with consumer preferences and thus deviates from Pareto optimality. The chapter discusses the forms of government intervention, such as regulation, subsidies, and public production, to address the inefficiencies caused by monopolies and oligopolies. It also briefly touches upon the issue of unequal power in the marketplace, highlighting the role of discrimination in creating imbalances and the need for state intervention to counteract these effects.
Market failures: This section explores the concept of market failure, specifically focusing on public goods. It differentiates between pure and impure public goods, emphasizing the characteristics that lead to their underprovision by the private sector. The inability to exclude non-paying consumers and the non-rivalrous nature of consumption are highlighted as key reasons for market failure in the case of public goods. The chapter advocates for public provision as the appropriate form of state intervention to address this market failure.
Keywords
Neoclassical economics, welfare economics, market failure, imperfect competition, monopolies, oligopolies, public goods, externalities, Pareto optimality, state intervention, social welfare, resource allocation, income distribution.
Neoclassical Welfare Economics: A Comprehensive Guide - FAQ
What is the main topic of this text?
This text focuses on neoclassical economic theory of welfare, specifically exploring its justification for government intervention in the economy. It analyzes situations where markets fail to achieve optimal resource allocation and equitable distribution, emphasizing the roles of imperfect competition, market failures (including public goods), and externalities.
What are the key themes explored in this text?
Key themes include: the neoclassical justification for state intervention, market failures as a reason for government involvement, the negative impact of imperfect competition (monopolies and oligopolies) on efficiency and social welfare, the concept and implications of public goods, and the effects of externalities on resource allocation.
What is the neoclassical economic theory of welfare, and how does it justify state intervention?
The neoclassical theory of welfare uses the concepts of Pareto optimality and market failure to justify state intervention. It argues that perfectly competitive markets lead to optimal resource allocation (First Fundamental Theorem), but that real-world markets rarely meet these conditions. Deviations from perfect competition and market failures necessitate government intervention to improve resource allocation and address inequitable outcomes (Second Fundamental Theorem).
What are the different types of market failures discussed?
The text discusses several types of market failures. Imperfect competition (monopolies and oligopolies), where producers restrict output to increase prices, resulting in inefficient resource allocation. Public goods, characterized by non-excludability and non-rivalry, are underprovided by private markets due to free-rider problems. Externalities, costs or benefits imposed on third parties not involved in a transaction, also lead to suboptimal resource allocation.
How does imperfect competition lead to market failure?
Imperfect competition, particularly monopolies and oligopolies, leads to market failure because firms with market power restrict output and raise prices above competitive levels. This reduces consumer surplus, leading to inefficient allocation of resources and a loss of overall social welfare. The text explores government interventions like regulation, subsidies, and public production as potential solutions.
What are public goods, and why do they represent a market failure?
Public goods are characterized by non-excludability (difficult to prevent non-payers from consuming) and non-rivalry (one person's consumption doesn't diminish another's). These characteristics make private provision inefficient because of the free-rider problem—individuals have an incentive to consume the good without paying, leading to underproduction by the private sector. Government provision is often suggested as a solution.
What are externalities, and how do they relate to market failure?
Externalities are costs or benefits that affect parties not directly involved in a transaction. Negative externalities (e.g., pollution) lead to overproduction, while positive externalities (e.g., education) result in underproduction. These deviations from optimal resource allocation constitute market failure and often require government intervention, such as taxes or subsidies, to correct the inefficiency.
What are the chapter summaries included in the text?
The text provides summaries for the Introduction, the justification for state intervention based on market failures, imperfect competition, and market failures concerning public goods. The Introduction sets the stage by discussing the neoclassical perspective and its emphasis on utilitarianism and individual rationality. The following chapters delve into the theorems of welfare economics, analyze imperfect competition and its consequences, and explore the complexities of public goods and their underprovision in the market.
What are the keywords associated with this text?
Keywords include: Neoclassical economics, welfare economics, market failure, imperfect competition, monopolies, oligopolies, public goods, externalities, Pareto optimality, state intervention, social welfare, resource allocation, income distribution.
- Quote paper
- Fotini Mastroianni (Author), 2016, New Classical economists. Why do New Classical economists believe that economic policy is ineffective?, Munich, GRIN Verlag, https://www.grin.com/document/351391
