[johnwinters91]

Professor,

Do prices in a free market lead to the maximization of an economy’s production possibilities frontier?

When someone says prices maximize efficiency, what is usually meant by that?

[jmherbener]

The PPF is usual thought of as the maximum potential output of the economy, given its resources and technology. If so, then a free market (with its array of prices) will result in production at a point on the PPF. Prices distorted by government intervention will result in production at a point interior to the PPF. The economy will produce less than its potential.

[Author]

Posts