From the NY Times:
The field of mechanism design theory strives to systematically take into account the realities of economic life. Adam Smith’s “invisible hand” is a powerful metaphor that describes how the market, in theory, will always efficiently allocate scarce resources.
Yet real-world conditions tend to complicate things. Competition is not completely free, consumers are not perfectly informed, optimizing private production and consumption may have social costs, and institutions can strongly shape economic bargaining.
“It’s not enough to say perfect competition doesn’t work in many cases,” Professor Hurwicz said in an interview yesterday. “It should lead us to design economic institutions and mechanisms to bring better outcomes.”
A public good like clean air, for example, is not accounted for in ordinary market transactions. Mechanism design theory provides a framework for determining whether government taxation is called for, and, if so, how to best design such as system.
From the LA Times:
Three American scholars who study how markets work when buyers and sellers have incomplete information were awarded the Nobel prize in economics Monday.
Traditional economics is based on assumptions that don't exist in the real world. One such assumption is that all actors in the marketplace have the same information. In the 1960s, Hurwicz began to grapple with the
problem of how markets function -- or fail -- when buyers and sellers don't know
the same things....in 1972 Hurwicz wrote a seminal paper that described the importance of creating incentives for people to divulge private information that would make economic outcomes more efficient.
They analyzed ways to organize markets and other economic mechanisms so they function optimally even when buyers and sellers have access to different information. Their work has been applied to a wide variety of situations, including cap-and-trade systems for reducing carbon pollution and auctions of bandwidth for television and mobile phones.
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