How Realistic is the Supply/Demand Equilibrium Story? A Simple Demonstration of False Trading and its Implications for Market Equilibrium
Neil H. Buchanan
George Washington University Law School
November 9, 2010
The Journal of Socio-Economics, Vol. 37, No. 1, pages 400-415, 2008
Transactions at non-equilibrium prices are false trades. Under standard assumptions, markets without false trading produce Pareto-efficient outputs. This paper demonstrates graphically the complications created when false trades occur, showing that quantities produced deviate from Pareto-efficient quantities except under unique conditions. In a general equilibrium framework, this spills over to cause Pareto-inefficient results in other markets as well. These observations call into question the use of standard supply-and-demand equilibrium theory as a starting point for policy analysis.
Number of Pages in PDF File: 35
Keywords: Tâtonnement, False Trading, Pareto Efficiency, Convergence, Disequilibrium
JEL Classification: B41, D50
Date posted: April 4, 2006 ; Last revised: November 10, 2010
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