Green Economics - The basics

 

Market Mechanisms
Benefits and costs and their evaluation are attributed within a certain market environment. The graph in figure 2 illustrates the basic situation of supply and demand, (factors such as fluctuation in income and the cost of replacement goods are assumed to be constant for simplicity). In this example the market finds the "natural" equilibrium point resulting in the most efficient allocation of resources. Here price is the determinant, i.e. it determines how much of the good people are willing to buy and how much firms will offer for sale. At the point e customers marginal valuation is equal to the marginal cost of production, labour, raw materials etc. Efficiency is optimised, as long as the structural conditions for perfect competition are satisfied i.e
  • Large numbers of buyers and sellers
  • Perfect information
  • Goods exchanged can in principle be individually owned
  • The full costs of production and consumption are reflected in the market price
Figure 2
This optimum allocation means that there is no alternative position that would leave as many people at least as well off and some people even better off.