![]() Example: externality.Įxternality – is the impact of one person’s actions of the well-being of a bystander ![]() Market failure – situation in which the market on its own fails to allocate resources efficiently. Governments can sometimes improve market outcomes ”Invisible hand of the marketplace” – Adam Smith.ħ. “An inquiry into the nature and causes of the wealth of Nations” – a book of Adam Smith 1776. Market economy – an economy that allocates resources through the decentralized decision of many firms and households as they interact in markets for good and services. ![]() Markets are usually a good way to organize economic activity.Ĭentral planning – only the government could organize economic activity. The economy, as a whole, can produce more when each person specialize in a task and trades with each others.Ħ. ![]() This increase in output is due to specialization: each person specializes in the task that he is good at performing. ![]()
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