CHAPTER 16 • General Equilibrium and Economic Efficiency 601 1400 DAX 1200 1000 S&P Index 800 600 400 FTSE 200 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 F IGURE 16.3 STOCK PRICES IN THE UNITED STATES AND EUROPE Three stock market indices—the S&P 500 in the United States, the FTSE in the United Kingdom, and the DAX in Germany—are plotted together, scaled so that each starts at 100 in 1984 The indices tend to move together, increasing and decreasing at about the same time Data from www.worldbank.org Economic Efficiency In Chapter we saw that a competitive market is economically efficient because it maximizes aggregate consumer and producer surplus This is what we normally mean when we use the term economic efficiency But, how does this important concept of economic efficiency apply when we take into account the interrelationship of markets, whether open to free trade or restricted, whether market-oriented or planned, and whether highly regulated or not? Fortunately, there is a concept of economic efficiency that applies when there is no market at all, but instead people simply trade with each other The rest of this chapter and, to some extent the remaining chapters in the book, address these questions about economic efficiency and evaluate their implications The analysis that follows is somewhat more complex than what has gone before; we are now focusing on the interplay of multiple markets with multiple entities competing against each other or trading with each other Moreover, there are important equity implications that flow from the workings of competitive markets in general equilibrium, and we need to consider those equity issues To avoid losing many of our readers along the way, our strategy is to build the theoretical analysis slowly and step by step