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ECON 219 Chapter 16.docx

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Economics (Arts)
Course Code
ECON 219
Christopher Ragan

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ECON 219 Chapter 16 Basic Functions of Government • which mix of government intervention and markets best suits everyone • monopoly of violence Free Markets Allocative Efficiency --> market efficiency :: we have allocated resources efficiently in a way that maximizes our use of resources. * free markets are based on the concept of allocative efficiency • the informal case is based off three observations: -> free markets coordinate actions automatically: price signals, no need to collect data -> the pursuit of profits leads to innovation and growth -> free markets decentralize economic power Market Failures • a situation in which the free market fails to achieve allocative efficiency market power firms with market power will typically reduce output below competitive levels and lead to allocative inefficiency -- this is the motivation for competition policy Externalities when actions taken by firms or consumers impose costs or confer benefits on third parties. --> individual agents care about private costs but what matters for allocative efficiency is social cost -->
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