Macroeconomics Chapter 2 Appendix Notes.docx - Chapter 2 Appendix Adam Smith the invisible hand and the 5 roles of government Adam Smith laissez-faire

Macroeconomics Chapter 2 Appendix Notes.docx - Chapter 2...

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Chapter 2 AppendixAdam Smith, the invisible hand, and the 5 roles of governmentAdam Smith- laissez-faire, less government or limited role for governmentInvisible Hand-Pursuing own self interest, maximizes social welfare. If everyone pursued their own self-interest, then as an unintended result, like the invisible hand, social welfare will be maximized. Self-interest does not necessarily mean being greedy. It could be personal fulfillment from donations or volunteering5 Roles of Government1.Dealing with externalities- Spillover effects, such as pollution.2.Dealing with public goods- Nonexclusive (national defense or light from a lighthouse), Non rival consumption (we can both consume the good and consumption is not rival), Marginal Cost of additional users is 0.3.Dealing with monopolies- Make sure that markets remain competitiveThese three are known as market failures4.Protection of Private Property- Gives people the incentives to be the best they can be, pursue their own self interests.5.Income redistribution- Government can help redistribute to people, helping least advantaged peopleThree Final Important Concepts1.There is no such thing as a free lunch- Produced with scarce resources that are not free.
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