PrintIn this lesson, we introduced the concepts of rational decision making, market exchange and equilibrium, transactions costs and externalities. You learned:
- in a conventional economic model, free markets maximize welfare. Rational buyers facing diminishing marginal utility of consumption, and rational sellers facing increasing marginal costs of production will exhaust all opportunities for beneficial exchange when they are permitted to freely trade their resources.
- in a conventional economic model, buyers and sellers incur no costs to transact with one another. Such 'frictionless exchange' makes irrelevant any externalities that may be associated with the exchange. But importantly, the conventional economic model's welfare properties depend critically upon the absence of these imperfections which would otherwise arise from exchange frictions.
- introducing transactions costs results in externalities that cannot be resolved through market exchange. These market imperfections create incentives for stakeholders to expend resources affecting an exchange to which they are not party.
Have you completed everything?
You have reached the end of Lesson 1! Double-check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there.