PPF

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  • #18958

    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?

    #18959
    jmherbener
    Participant

    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.

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