EC 200-B01

Adam Smith’s world

  • Supply: producers bear the only costs (marginal social cost)
  • Demand: consumers receive the only benefits (marginal social benefit)
  • Smith-like conception: whatever two consenting adults do between themselves is acceptable, as long as no one else is affected. This leads to freedom of contract

  • market failures: when the free market doesn’t create the optimal result for society
    • public goods (consumed as a society, non-exclusionary, example – roads)
    • “the problem of the commons”
    • commonly-held resources are typically held in low regard
    • externalities (pollution, etc)
    • lack of info
    • monopoly
  • governmental failures
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