How Realistic is the Supply/Demand Equilibrium Story? A Simple Demonstration of False Trading and its Implications for Market Equilibrium

Authors

Neil H. Buchanan, George Washington University Law SchoolFollow

Document Type

Article

Publication Date

2010

Status

Accepted

Abstract

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.

SSRN Link

http://ssrn.com/abstract=894185

Recommended Citation

Neil H. Buchanan, How Realistic is the Supply/Demand Equilibrium Story? A Simple Demonstration of False Trading and its Implications for Market Equilibrium, 37 J. of Socio-Econ. 400 (2010).