4.11

Skip to 0 minutes and 15 secondsUntil now, we have spoken about markets without having explained what we mean by it. In daily life, markets are often identified as a one-directional focus on short-term profits, ignoring long-term effects for society. Although there are plenty of examples in which specific markets indeed showcase such tendencies, in economics, markets are treated more abstract. This abstract notion is that markets are viewed as coordination mechanisms between many individual producers and consumers. Markets collect all information on supply and demand and consequently determine the price which equalises both. Individual suppliers and consumers do not need to monitor what others are doing, but knowing the market price is sufficient to optimise their decisions.

Skip to 1 minute and 10 secondsIt belongs to the fundamental economic insights that this privately optimising behaviour based on market prices results in socially optimal outcomes. This insight is called the "welfare theorem of microeconomics." This result is realised if the market is transparent and nobody is able to strategically influence market outcomes. As a consequence, any intervention in the decisions of individual agents reduces welfare. This conclusion only holds if markets are perfect, but markets are almost never perfect. This holds also for energy markets. These markets suffer from different types of market failures, as we have seen before. This theorem has an important consequence for the analysis of policies meant to realise an energy transition.

Skip to 2 minutes and 9 secondsThis consequence is that this policy can only be welfare-improving if it is directed at correcting market failures. We will come back to this later.

The ‘invisible hand’ of markets as a coordination instrument

In this video Machiel explains the economic notion of markets. You will learn how markets markets help individual producers and consumers in making their decisions. Machiel discusses the welfare theorem of microeconomics and consequently revisits the concept of market failures, to talk about their consequences for the analysis of policies meant to realize energy transition.

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This video is from the free online course:

Solving the Energy Puzzle: A Multidisciplinary Approach to Energy Transition

University of Groningen