General Competitive Market Problems that create Public Policy Opportunities
• The competitive model is static
• Any changes in the model result in a new equilibrium
• Assumes no transaction costs or adjustment costs will be incurred when moving between equilibriums
• The real economy changes constantly, markets adjust but there are problems
o Sticky prices – prices and wages that can’t adjust immediately
o These are not always market failures (though they are sometimes as we will see in the rest of this chapter)
o Public policy programs can create more efficient economies
Example: unemployment benefits can help in job transitions