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Marketextern - Economic Freedom Economic freedom refers to...

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1 Market Failure Chapter 14 Externalities Economic Freedom Economic freedom refers to the degree to which private individuals are able to carry out voluntary exchange without government involvement. The United States is only about the 10th freest economy in the world. Economic freedom is linked to standards of living. Market Failures Market failure the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes. Market Failure • A market failure occurs when the market outcome is not the socially efficient outcome. Some action by the government is sometimes necessary to ensure that the market does work well. Action is also necessary as a result of rent seeking : the use of resources to transfer wealth from one group to another without increasing production or total wealth. Externalities Private costs and benefits are costs and benefits that are borne solely by the individuals involved in the transaction. An externality is a cost or benefit that accrues to someone who is not the buyer (demander) or the seller (supplier). If externalities exist, it means that those involved in the demand and supply in the market are not considering all the costs and benefits when making their market decisions. As a result, the market fails to yield optimal results. Externalities Externalities are the effect of a decision on a third party that is not taken into account by the decision-maker.
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