There are two main reasons
why society does not rely exclusively on the market to allocate its scarce
resources. The first is that economic efficiency does not always result from
pure market forces. The second is to alter the distribution of goods and
services to households. Economic efficiency is a separate issue from income
distribution. In a society of 98% paupers and 2% millionaires, economic
efficiency still prevails if each individual satisfies his wants to the
greatest extent possible given his claim on society’s scarce resources.
On the subject of economic
efficiency, it has been assumed so far that (a) firms pay the full cost of
producing the goods and services that they sell, and (b) households have to pay
for the goods and services they consume. These situations are called
externalities and public goods.
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