How fair are market outcomes?

Question

can you provide me with an example?

Answer 1

In theory people are paid  according to their productivity and goods are priced so they are allocated by supply and demand so in the since of fair being people getting what the deserve it is fair. However the real world does not operate the way  the simple theory describes. Many  occupations pay "winner take all" wages so that most the rewards go to one person that is the best athlete, actor or in even CEO pay. The risk shifting in the financial industry is a major source of "unfairness" The recent sub prime mortgage crisis is  a prime example of of this. One hedge fund manager made over a billion dollars  and many of the people who were responsible for the mess made millions in commissions on the mortgage back securities and the tax payers are going to end up stuck with a bill of billions.

Answer 2

Barring externalities, such as the problem of the commons http://en.wikipedia.org/wiki/Tragedy_of_... it can be shown that a market outcome is Pareto optimal for goods in the core of the economy.  It is possible, for goods not in the core, to form a coalition of traders, to limit full market access.  This is much like the problem of the commons however.

The simplified reason for the fairness issue is that no one is compelled to participate and if prices are too high, you will walk away and if they are too low, prices will quickly be bid up.  So all participants can acquire the highest welfare in a competitive market.  Where monopolies exist, there is some social loss created, but it may be small compared to larger social gains.  Medicine is an example.  Really high prices support the fact that only 1 in 100 drugs makes it through approval, 99% of medical research is wasted money, doing things that end up not working or not being safe.  If drug companies could not have patents, they would not try to develop drugs, because the manufacture cost for most drugs is trivial, often 1% of price on new drugs.  The big cost is throwing the money away on failed research.

Where markets are unfair, but just, is where someone clearly has a need, but not the means to pay.  Markets cannot differentiate needs versus wants.  If you are hopelessly poor because you have very few marketable skills, then while it is not your fault, you will be unable to acquire in some circumstances the goods or services to sustain life because a more productive individual was able to pay for them.  This is particularly hard on previously productive, but currently ill people.  On the one hand, it assures that scarce medical care will go to the highest producing citizens first, sustaining societal production and permitting money for charity, on the other hand, it is merciless and mindlessly indifferent to suffering.  This is another example of an externality.  Where everyone exercising their preferences leads to unintended consequences.

In the absence of externalities, competitive markets are the most fair of all possible outcomes, such as negotiating a wage with your boss that both can accept.

Answer 3

Fair and Markets go hand in hand.  The price for a product or service is determined by markets. And the price anybody pays for anything is the fair price at that moment in time.