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Lecture 3

ECON 1010 Lecture 3: Lecture 3

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ECON 1010
Laura K.Brown

o|82 o Smiths insight maximized the welfare of society as a whole 1. Outcome of invisible hand: when the government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the millions of households and firms that make up the economy 1. This outcome explains why taxes affect the allocation of resources: taxes distort prices that thus the decisions of households and firms 1. Also explains the greater harm cause by policies that directly control prices, and the failure of communism 1. In communist countries, prices were not determined in the marketplace, but were dictated by central planners 2. Principle #7: Governments can sometimes improve market outcomes 1. One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy o Markets only work if property rights are enforced 1. Property rights: the ability of an
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