Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/196767 
Authors: 
Year of Publication: 
2019
Series/Report no.: 
IZA Discussion Papers No. 12269
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
The perfectly competitive market – a hypothetical situation free of market failure – is the basis for the two fundamental welfare theorems, and an important benchmark for economic theory. The radical abstractions of this idea, however, make its full implications hard to grasp. I address this using literary fiction. Part I discusses fiction as a tool for economic theory. Part II is a story about a journey to the perfectly competitive market. Part III develops main theoretical insights based on the story: First, complete social isolation is needed to preclude market failure. Second, the requirements of symmetric information and no external effects are extremely hard to reconcile, leading to an impossibility theorem: if trade is permitted anytime, and deliberate, welfare-relevant learning is feasible, no perfectly competitive market can exist.
Subjects: 
perfect competition
narratives
social interaction
symmetric information
complete contracts
labor markets
JEL: 
A11
D60
D62
D82
Document Type: 
Working Paper

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