ECONOMICS

Economics

Economics

The purpose of this assignment is to analyze the statement that “Rational consumers and producers maximise their welfare by thinking at the margin.” Inherent in the concept of consumer welfare, as articulated by Judge Bork and embraced by antitrust enforcers twenty years ago, is a very specific view of the optimal relationship between the antitrust law and the competitive process. Competition, which is the hallmark of free-market capitalism, has consistently proven itself to be a very effective (frankly the most effective) means of maximizing a society's wealth in the face of scarcity (that is, limited resources). Competition accomplishes this invaluable economic feat by facilitating the creation of two types of efficiency.

First, competitive free markets tend to maximize “allocative efficiency.” That is, competition serves to allocate scarce resources to their highest and best use by creating incentives for producers to compete to expand output in a market until the cost of last unit of output (“marginal” cost) is equal to the market-clearing price. At that point, the market is allocating the optimal amount of society's total resources to production of that market's good or service - any less and some consumers who value the good or service at or above its marginal cost are deprived of the output, any more and the cost of the resources to produce the marginal unit of output will be greater than the value of that unit.

It is, of course, also the case that private restraints that reduce allocative efficiency by raising price also transfer to the market's producers surplus that consumers would have enjoyed in the absence of the restraint. Indeed, it is the hope of gaining such surplus that motivates the restraint in the first place. However, unlike the lost surplus (i.e., the “deadweight loss”) that represents the diminution of allocative efficiency, society still enjoys the transferred surplus. The offending producers are, at the end of the day, also consumers (albeit in some other market) and their “consumption” of the transferred surplus also counts toward society's aggregate utility or welfare. As explained below, there is no coherent a priori basis for believing that consumers in any given market are inherently more deserving of surplus than the producers in that market.

The social value of the surplus is the same. Nevertheless, as a practical matter, under the 1980s concept of consumer welfare, the antitrust laws do seek to deprive antitrust offenders of the transferred surplus in order to deter illicit agreements or tactics. Second, the welfare of consumers as a whole (that is, the 1980s concept of consumer welfare) is improved by increases in productive (or technical) efficiency. Productive efficiency is generated when production is improved to produce the same level of output using fewer resources (inputs) or to produce more valuable (i.e., higher quality) output using the same resources. Unlike allocative efficiency which is a static concept that is maximized when price equals marginal cost and cannot be improved beyond that point, productive efficiency is a more dynamic concept that can literally always be improved and ...