Disagreements on the Market

A general equilibrium model of publicly traded firms is provided in the case of a perfect market; it shows how, at the market equilibrium, shareholders agree that profits should be maximized, and about how to compute profits. Hence, they all agree on the objectives of the firms. Next three different contexts of market failure are introduced: incomplete financial markets, production externalities, and monopolistic competition. By use of a common tool (value vectors), it is shown how the market mechanism fails to generate full alignment between shareholders: when facing production externalities or monopolistic competition, shareholders do not necessarily agree that profit should be maximized; when facing incomplete financial markets, shareholders disagree on how to compute profits. In a nutshell: trading on the market generates agreement, but if trading is incomplete or imperfectly competitive then agreement is only partial, and the residual disagreements give rise to problems for collective decision-making.