Microeconomics Question from Walter E. Williams:[]
Imagine a community of individuals engaging in private production but where the idea of market exchange had not yet been discovered. Explain analytically the nature of the gains available after the discovery of exchange possibilities. Would every member of the community benefit, or might some be harmed as a result of the discovery?
Answer[]
Prior to the emergence of market exchange, individuals will produce on their own production possibility frontier (PPF) at the point that maximizes their own personal utility. Once market exchange emerges, they will specialize by moving to the point on their PPF having the same slope as the market price ratio curve--i.e., the opportunity to exchange causes individuals to shift their production towards that good for which they have the lowest opportunity cost of production. From that production point on the individual's PPF, they will then engage in exchange, moving along the market price ratio curve to maximize their own personal utility. This places them at a consumption point beyond the limits of their personal PPF--that is, they are made better off by specializing in production and then engaging in market exchange. Generalizing from this, society is made better off by production specialization and market exchange.
Once market exchange does emerge, individuals who maintain the practice of autarky (that is, economic self-sufficiency) generally will not be made worse off by other individuals engaging in market exchange. The chief exception to this is when other parties engage in exchanges which create negative externalities. Conversely, those practicing autarky could be made better off if market exchange by others creates positive externalities. False complaints of harm, such as having to engage in market competition with new individuals or firms better suited to produce a certain good or service, might be raised--but such complaints should not be heeded. Instead, those so complaining should seek either to increase the quality of what they produce or find other production opportunities for which they have the least opportunity cost relative to all other market participants.
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