Many things perform effectively but not efficiently. To be efficient means to produce a desired effect with as little waste as possible.
How can markets be designed to make them more efficient? This is a question that the three winners of this year's Nobel Prize in economics have tried to answer. They established mechanism design theory.
It began with work by Leonid Hurwicz of the University of Minnesota in 1960s. Eric Maskin of the Institute for Advanced Study in Princeton, New Jersey, and Roger Myerson of the University of Chicago further developed it.
The three Americans will share the award worth about one and a half million dollars. The Royal Swedish Academy of Sciences announced the winners this week.
In everyday life, there are many things that get in the way of efficient markets. There may not be true competition. Buyers and sellers may keep some information private from each other. Also, the production and use of goods may result in outcomes like pollution or social costs.
Mechanism design theory permits economists to identify situations where markets work well and where they do not. For example, it shows why an auction is generally the most efficient way to sell many kinds of goods.
In fact, experts say the theory explains why a version called a double auction is often the best way to trade. In a double auction, buyers and sellers both make price bids.
The Swedish academy says the theory also explains why there is often no good market solution to providing some goods, like uncrowded roads.
Mechanism design theory is part of the wider economic idea of game theory and it has many uses -- including in political science.
Roger Myerson even built a mathematical model for elections. He found a voting system that he says would have helped Florida avoid its problems in the 2000 presidential election.
The Nobel Prize award ceremonies will take place on December 10. The official name of the economics award is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The Swedish central bank created the prize in nineteen sixty-eight.
Leo Hurwicz was born in Russia in 1917. He developed new ways to understand markets. He began his work after World War Two. At ninety years old, he is the oldest person ever to win a Nobel Prize.
And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Bob Doughty.
