Chapter 15 - Chapter 15 The shortcomings of the free...

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Chapter 15 The shortcomings of the free markets What does the market do poorly? market economies suffer from severe business fluctuations the market distributes income unequally where markets are monopolized, they allocated resources inefficiently the market deals poorly with the side effects of many economic capabilities. the market cannot readily provide public goods, such as national defense. the market may do a poor job of allocating resources between eh present and the future. the market mechanism makes public and personal services increasingly expensive, which often induces socially damaging countermeasures by government. efficient resource allocation: a review the production possibilities frontier is a curve that shows the maximum quantities of outputs it is possible to produce with the available resource quantities and the current state of technological knowledge an efficient allocation of resources requires that each product’s price be equal to its marginal cost, that is P = MC Resources are misallocated if it is possible to change the way they are used or the combination of goods and services they produce and thereby make consumers better off. if a commodity’s price is higher than its marginal cost, the economy will tend to produce less of that item than would maximize consumer benefits. the opposite will occur if an item’s price is lower than its marginal cost Externalities: Getting the prices wrong an activity is said to generate a beneficial or detrimental externality if that activity causes incidental benefits or damages to others not directly involved in the activity and no corresponding compensation is provided to or paid by those who generate the externality. externalities and inefficiency
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Chapter 15 - Chapter 15 The shortcomings of the free...

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