Public Policy Midterm 1

Invisible Hand

The idea that people pursuing their own economic interests can also help meet society’s needs. Businesses want to earn profits, so they produce goods that people want to buy. Under certain conditions, this helps allocate resources without a central planner directing everyone.

Example: A baker sells bread to earn money, but also provides food that customers need.

Pareto efficiency versus equity

Whether resources can be rearranged to help someone without hurting anyone else. Equity concerns whether the distribution of resources is fair. An allocation can be Pareto efficient even when resources are distributed very unequally.

Example: One person could hold most of the resources, but redistributing them would make that person worse off. The allocation could therefore be Pareto efficient without being equitable

Competitive-market assumptions

The first asks whether anyone can benefit without making someone else worse off. The second asks whether benefits and burdens are distributed fairly. A distribution can meet the first standard while still being highly unequal.

Example: One person may own nearly everything, but redistributing it would make that person worse off.

Market Failure

There are many buyers and sellers, products are interchangeable, businesses can freely enter and leave, and everyone has complete information. No individual buyer or seller can control the price. The efficient outcome discussed in your review also requires that transactions create no unaccounted-for effects on outsiders.

Example: If one company controls nearly all the supply, these conditions are not met.