ECO100Y5 Chapter Notes - Chapter 16: Adverse Selection, Moral Hazard, Externality
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ECO100Y5 Full Course Notes
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The operative choice is not between an unhampered free-market economy and a fully centralised command economy. It is rather the choice of which mix of markets and government intervention best suits people"s hopes and needs. When the government"s monopoly of violence is secure and functions with effective restrictions against its arbitrary use, citizens can safely carry out their ordinary economic and social activities. Local corruption, powerful warlords, and a lack of basic political infrastructure combine to make official development aid less effective. Because of these, a growing share of official assistance to development countries is taking the form of political rather than economic assistance - often referred to as institution building. The decentralised market system is more flexible and adjusts more quickly to changes. As conditions continue to change, prices in a market economy will also change and decentralised decision makers can react continually. A market system allows for coordination without anyone needing to understand how the whole system works.
