The Undercover Economist - Part III- Perfect Markets and the "World of Truth"

- A world of truth leads to a perfectly efficient economy, one in which it is impossible to make someone better off without making someone else worse off

- price tells the truth: no one would buy things that are worth less than the asking price and sell things that are worth more to them than the selling price

- in a perfectly competitive market the price of coffee would equal to the marginal cost of coffee (if price were lower, firms would go out of business; if price were higher, new firms would enter)


Perfectly Competitive Market
- Companies are making things the right way (otherwise will go out of business)
- Companies are making the right things
- Things are being made in the right proportions
- Things are going to the right people (those willingto pay the right price)

Non-Market Systems
- Police Force / Schools (conceals the truth about values)

Why are Taxes Inefficient?
- They destroy the information carried by prices in perfectly competitive, effiient markets: price no longer equals costs, so cost no longer equals value
(Taxes are higher when price-sensitivity is low)

- Head start theorem (all efficient outcomes can be achieved using a competitive market, by adjusting the starting position) e.g. lump-sum payments & levying onetime taxes that puts everyone on an equal footing