ECON 104 Chapter 4: Chapter 4
9 Jun 2017
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Chapter 3 discusses the efficiency of the free markets. In other words, the exchanges in such markets are voluntary. Nobody forces people to trade, and any trade (its volume and the price) happens only if there is consent of every participant in that trade. I cannot, within the model that we have used, imagine an argument that tells us that such trade would happen if somebody expected to be made worse off by trade, they would simply not trade. Conclusion: voluntary trade can only make the exchanging parties better off, i. e. , it is always a pareto improvement. If the parties to the trade are made better off by trade, they will consent to it. We expect the opportunities for any pareto improvement to be realized: this conclusion is often expressed as the theorem of exchange. It"s common formulation: all gains from trade are exhausted on margin in equilibrium.
