How to structure your firm? How decision making should be allocated? The organization of an economy
* Decentralized economies are much more efficient than centralized economies * Invisible hand (Adam Smith) , markets are self-organizing systems that arise and evolve spontaneously and arrive at equilibrium prices and quantities on their own, without the need of central planner Markets as information systems
* Markets are form of collective intelligence, a powerful information system that cannot be replicated by central planner * Decentralization makes use of information of particular circumstances of time and place * Individual market agents act rationally and as rational agents optimize their decisions according to the information carried in market prices * Prices are en economical/cheap information system. However, when prices are not able to communicated cheaply information decentralized organization should be replaced by centralized as in the case of market inefficiencies.
Markets as Incentive systems
* Markets economy creates incentives for the efficient use of resources. If resources are not employed according to their most efficient use the market agent loses.
Benefits of Central Planning
* Arise due to market inefficiencies. Market inefficiencies occur due to economies of scale, public goods, +/-externalities * Natural monopoly, when economies of scale exist. ATC decline as Q increases, driven by large fixed costs. * Public goods, a good that will not be provided by profit seeking firms as they are unable to charge the price that covers their costs. These are good for which consumption cannot be prevented * Externalities arise when transactions between buyer and seller impose costs or provide benefits to a third party who is not part of the transaction. Pollution imposes negative externalities that are why it should be regulated. Tech spillovers reduce the incentives of companies to...
Please join StudyMode to read the full document