ECON 102 Lecture Notes - Lecture 5: Market Failure

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The government does not impose efficiency, since the unseen hand does the job in most situations. In other words, the incentives built into a market economy also mean that resources are generally put to good use, so that there is no wasting of opportunity to make people better off. If a college were known for its practice of crowding students into small classrooms while large classrooms go unused, its enrollment would quickly decrease, placing its administrators" jobs at risk. College students will respond to the "business" in a way that induces administrators to operate the college efficiently. A thorough description of why markets are typically so good at ensuring that resources are well used will have to wait until we"ve learned how the markets actually operate. But the most basic explanation is that incentives for mutual benefit are usually taken in a market economy, where individuals are free to choose what to consume and what to produce.

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