Thursday, 31 January 2013

The gains from trade

Chris Dillow at the Stumbling and Mumbling blog misses the point of the gains from trade:
Mario Balotelli's transfer to AC Milan highlights the Marxian critique of capitalism.

How can Man City get £19m for a player who is so obviously flawed? The answer's simple. It's because their great wealth means they did not need to sell him, and so could drive a hard bargain. The party in the strongest bargaining position gets most of the surplus from any trade.
How can Chris possible know the bargaining positions of the parties? How can he know the surplus that each party gets from the bargain. The important point to note here is that this trade was voluntary, both parties will only have agreed to it if they think they will gain from the bargain and the parties themselves are the only ones who know the amount of surplus they think they will get.

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