Economic Freedom
Economic freedom refers to the degree to which private individuals are able to carry out voluntary exchange without government involvement and externalities are the effect of a decision on a third party that is not taken into account by the decision-maker.
Abstract
• Economic freedom refers to the degree to which private individuals are able to carry out voluntary exchange without government involvement. • The United States is only about the 10th freest economy in the world. • Economic freedom is linked to standards of living. Market Failures • Market failure – the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes. Market Failure • A market failure occurs when the market outcome is not the socially efficient outcome. Some action by the government is sometimes necessary to ensure that the market does work well. • Action is also necessary as a result of rent seeking: the use of resources to transfer wealth from one group to another without increasing production or total wealth. Externalities • Private costs and benefits are costs and benefits that are borne solely by the individuals involved in the transaction. • An externality is a cost or benefit that accrues to someone who is not the buyer (demander) or the seller (supplier). • If externalities exist, it means that those involved in the demand and supply in the market are not considering all the costs and benefits when making their market decisions. • As a result, the market fails to yield optimal results. Externalities • Externalities are the effect of a decision on a third party that is not taken into account by the decision-maker. • Externalities can be either positive or negative.