CHAPTER5

Public Policy and Microeconomics

In This Chapter

  • When markets are inefficient
  • Externalities: negative and positive
  • The Tragedy of the Commons
  • When the government must provide public goods

Adam Smith showed us how firms, markets, and industries are efficient and can regulate themselves. He reasoned that competition gives market participants the incentive to produce the optimal quantity at a price that consumers are willing to pay. The producer benefits by realizing a profit, and the consumer benefits by getting a good price for a product he or she wants to buy.

There are instances when the markets do not operate efficiently, or it is ...

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