Eliana Garces, Apr 01, 2010
Interesting questions are being asked about the policy implications of relaxing commonly held assumptions about how people make decisions. If consumers are not always rationally maximizing some kind of utility function, can we still claim that their decisions are always in their own best interest? And should this be a policy concern at all? We commonly rely on the competitive process to produce the market outcomes that are the most favorable to consumers. In a model of rational behavior, firms in a competitive environment compete mostly on the merits and the market outcome is efficient and welfare-maximizing. Does this result continue to hold when the rationality assumption about consumer behavior is relaxed?
