Market Efficiency and Welfare Economics

These flashcards cover essential terms and concepts related to market efficiency, welfare economics, and the role of government interventions in economic theory.

Market Efficiency

A situation in which all available information is already reflected in the prices of assets, leading to optimal allocation of resources.

Invisible Hand

A metaphor introduced by Adam Smith to describe the self-regulating behavior of the marketplace, where individuals' efforts to purse their own interest can lead to positive societal outcomes.

Pareto Efficiency

A state of resource allocation where it is impossible to make one individual better off without making at least one individual worse off.

Pareto Improvement

A change in allocation that makes at least one individual better off without making anyone else worse off.

The Wealth of Nations

A seminal book published in 1776 by Adam Smith that laid the foundations of classical economics.

Fundamental Theorems of Welfare Economics

Key results that describe the relationship between competitive markets and Pareto efficiency, asserting that competitive market equilibria lead to efficient allocations.

Decentralized Allocation Mechanism

An economic system where individual firms and consumers make production and consumption decisions based on market interactions.

Centralized Allocation Mechanism

An economic system where a central planning agency makes production and consumption decisions.

Mercantilism

An economic theory and practice prevalent from the 16th to the 18th century that promoted governmental regulation of a nation's economy to augment state power.

Externalities

Costs or benefits incurred by third parties not directly involved in a transaction, often leading to market failures.