Ten Principles

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PART I Introduction

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CHAPTER

1 Ten Principles of Economics

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T

he word economy comes from the Greek word oikonomos, which means “one who manages a household.” At first, this origin might seem peculiar. But in fact, households and economies have

much in common. A household faces many decisions. It must decide which household members do which tasks and

what each member receives in return: Who cooks dinner? Who does the laundry? Who gets the extra dessert at dinner? Who gets to drive the car? In short, a household must allocate its scarce resources (time, dessert, car mileage) among its various members, taking into account each member's abilities, efforts, and desires.

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Like a household, a society faces many decisions. It must find some way to decide what jobs will be done and who will do them. It needs some people to grow food, other people to make clothing, and still others to design computer software. Once society has allocated people (as well as land, buildings, and machines) to various jobs, it must also allocate the goods and services

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they produce. It must decide who will eat caviar and who will eat potatoes. It must decide who will drive a Ferrari and who will take the bus.

The management of society's resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything she wants, each individual in a society cannot attain the highest standard of living to which she might aspire.

scarcity the limited nature of society's resources

Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by an all-powerful dictator but through the combined choices of millions of households and firms. Economists, therefore, study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. For instance, they examine how the multitude of buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold. Finally, economists analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.

economics the study of how society manages its scarce resources

The study of economics has many facets, but it is unified by several central ideas. In this chapter, we look at Ten Principles of Economics. Don't worry if you don't understand them all at first or if you aren't completely convinced. We explore these ideas more fully in later chapters. The ten principles are introduced here to give you an overview of what economics is all about. Consider this chapter a “preview of coming attractions.”

1-1 How People Make Decisions There is no mystery to what an economy is. Whether we are talking about the economy of Los Angeles, the United States, or the whole world, an economy is just a group of people dealing with one another as they go about their lives. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we begin our study of economics with four principles about individual decision making.

1-1a Principle 1: People Face Trade-offs You may have heard the old saying, “There ain't no such thing as a free lunch.” Grammar aside, there is much truth to this adage. To get something that we like, we usually have to give up something else that we also like. Making decisions requires trading off one goal against another.

Consider a student who must decide how to allocate her most valuable resource—her time. She can spend all of her time studying economics, spend all of it studying psychology, or divide it between the two fields. For every hour she studies one subject, she gives up an hour she could have used studying

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the other. And for every hour she spends studying, she gives up an hour that she could have spent napping, bike riding, watching TV, or working at her part-time job for some extra spending money.

Or consider parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or for children's college education. When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good.

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When people are grouped into societies, they face different kinds of trade-offs. One classic trade-off is between “guns and butter.” The more a society spends on national defense (guns) to protect its shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home. Also important in modern society is the trade-off between a clean environment and a high level of income. Laws that require firms to reduce pollution raise the cost of producing goods and services. Because of these higher costs, the firms end up earning smaller profits, paying lower wages, charging higher prices, or some combination of these three. Thus, while pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firms' owners, workers, and customers.

Another trade-off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society's members. In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices.

efficiency the property of society getting the most it can from its scarce resources equality the property of distributing economic prosperity uniformly among the members of society

When government policies are designed, these two goals often conflict. Consider, for instance, policies aimed at equalizing the distribution of economic well-being. Some of these policies, such as the welfare system or unemployment insurance, try to help the members of society who are most in need. Others, such as the individual income tax, ask the financially successful to contribute more than others to support the government. Though they achieve greater equality, these policies reduce efficiency. When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller.

Recognizing that people face trade-offs does not by itself tell us what decisions they will or should make. A student should not abandon the study of psychology just because doing so would increase the time available for the study of economics. Society should not stop protecting the environment just because environmental regulations reduce our material standard of living. The poor should not be ignored just because helping them distorts work incentives. Nonetheless, people are likely to make good decisions only if they understand the options that are available to them. Our study of economics, therefore, starts by acknowledging life's trade-offs.

1-1b Principle 2: The Cost of Something Is What You Give Up to Get It Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of an action is not as obvious as it might first appear.

Consider the decision to go to college. The main benefits are intellectual enrichment and a lifetime of better job opportunities. But what are the costs? To answer this question, you might be tempted to add up the money you spend on tuition, books, room, and board. Yet this total does not truly represent

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what you give up to spend a year in college. There are two problems with this calculation. First, it includes some things that are not really costs

of going to college. Even if you quit school, you need a place to sleep and food to eat. Room and board are costs of going to college only to the extent that they are more expensive at college than elsewhere. Second, this

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calculation ignores the largest cost of going to college—your time. When you spend a year listening to lectures, reading textbooks, and writing papers, you cannot spend that time working at a job. For most students, the earnings they give up to attend school are the single largest cost of their education.

The opportunity cost of an item is what you give up to get that item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action. In fact, they usually are. College athletes who can earn millions if they drop out of school and play professional sports are well aware that the opportunity cost of their attending college is very high. It is not surprising that they often decide that the benefit of a college education is not worth the cost.

opportunity cost whatever must be given up to obtain some item

1-1c Principle 3: Rational People Think at the Margin Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. As you study economics, you will encounter firms that decide how many workers to hire and how much of their product to manufacture and sell to maximize profits. You will also encounter individuals who decide how much time to spend working and what goods and services to buy with the resulting income to achieve the highest possible level of satisfaction.

rational people people who systematically and purposefully do the best they can to achieve their objectives

Rational people know that decisions in life are rarely black and white but usually involve shades of gray. At dinnertime, the question you face is not “Should I fast or eat like a pig?” More likely, you will be asking yourself “Should I take that extra spoonful of mashed potatoes?” When exams roll around, your decision is not between blowing them off and studying twenty-four hours a day but whether to spend an extra hour reviewing your notes instead of watching TV. Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action. Keep in mind that margin means “edge,” so marginal changes are adjustments around the edges of what you are doing. Rational people often make decisions by comparing marginal benefits and marginal costs.

marginal change a small incremental adjustment to a plan of action

For example, suppose you are considering calling a friend on your cell phone. You decide that talking with her for 10 minutes would give you a benefit that you value at about $7. Your cell phone service costs you $40 per month plus $0.50 per minute for whatever calls you make. You usually talk for 100 minutes a month, so your total monthly bill is $90 ($0.50 per minute times 100 minutes, plus the $40 fixed fee). Under these circumstances, should you make the call? You might be tempted to reason as follows: “Because I pay $90 for 100 minutes of calling each month, the average minute on the phone costs me $0.90. So a 10-minute call costs $9. Because that $9 cost is greater than the $7 benefit, I am going to skip the call.” That conclusion is wrong, however. Although the average cost of a 10-minute call is $9, the marginal cost—the amount your bill increases if you make the extra call—

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is only $5. You will make the right decision only by comparing the marginal benefit and the marginal cost. Because the marginal benefit of $7 is greater than the marginal cost of $5, you should make the call. This is a principle that people innately understand: Cell phone users with unlimited minutes (that is, minutes that are free at the margin) are often prone to make long and frivolous calls.

Thinking at the margin works for business decisions as well. Consider an airline deciding how much to charge passengers who fly standby. Suppose that flying a 200-seat plane across the United States costs the airline $100,000. In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted

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to conclude that the airline should never sell a ticket for less than $500. But a rational airline can increase its profits by thinking at the margin. Imagine that a plane is about to take off with 10 empty seats and a standby passenger waiting at the gate is willing to pay $300 for a seat. Should the airline sell the ticket? Of course, it should. If the plane has empty seats, the cost of adding one more passenger is tiny. The average cost of flying a passenger is $500, but the marginal cost is merely the cost of the bag of peanuts and can of soda that the extra passenger will consume. As long as the standby passenger pays more than the marginal cost, selling the ticket is profitable.

“Is the marginal benefit of this call greater than the marginal cost?”

Marginal decision making can help explain some otherwise puzzling economic phenomena. Here is a classic question: Why is water so cheap, while diamonds are so expensive? Humans need water to survive, while diamonds are unnecessary; but for some reason, people are willing to pay much more for a diamond than for a cup of water. The reason is that a person's willingness to pay for a good is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit, in turn, depends on how many units a person already has. Water is essential, but the marginal benefit of an extra cup is small because water is plentiful. By contrast, no one needs diamonds to survive, but because diamonds are so rare, people consider the marginal benefit of an extra diamond to be large.

A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. This principle explains why people use their cell phones as much as they do, why airlines are willing to sell tickets below average cost, and why people are willing to pay more for

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diamonds than for water. It can take some time to get used to the logic of marginal thinking, but the study of economics will give you ample opportunity to practice.

1-1d Principle 4: People Respond to Incentives An incentive is something (such as a prospect of a punishment or reward) that induces a person to act. Because rational people make decisions by comparing costs and benefits, they respond to incentives. You will see that incentives play a central role in the study of economics. One economist went so far as to suggest that the entire field could be summarized as simply “People respond to incentives. The rest is commentary.”

incentive something that induces a person to act

Incentives are crucial to analyzing how markets work. For example, when the price of an apple rises, people decide to eat fewer apples. At the same time, apple orchards decide to hire more workers and harvest more apples. In other words, a higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more. As we will see, the influence of prices on the behavior of consumers and producers is crucial for how a market economy allocates scarce resources.

Public policymakers should never forget about incentives: Many policies change the costs or benefits that people face and, as a result, alter their behavior. A tax on gasoline, for instance, encourages people to drive smaller, more fuel-efficient cars. That is one reason people drive smaller cars in Europe, where gasoline taxes are high, than in the United States, where gasoline taxes are low. A higher gasoline tax also encourages people to carpool, take public transportation, and live closer to where they work. If the tax were larger, more people would be driving hybrid cars, and if it were large enough, they would switch to electric cars.

When policymakers fail to consider how their policies affect incentives, they often end up with unintended consequences. For example, consider public policy regarding auto safety. Today, all cars have seat belts, but this was not true fifty

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years ago. In the 1960s, Ralph Nader's book Unsafe at Any Speed generated much public concern over auto safety. Congress responded with laws requiring seat belts as standard equipment on new cars.

How does a seat belt law affect auto safety? The direct effect is obvious: When a person wears a seat belt, the probability of surviving an auto accident rises. But that's not the end of the story because the law also affects behavior by altering incentives. The relevant behavior here is the speed and care with which drivers operate their cars. Driving slowly and carefully is costly because it uses the driver's time and energy. When deciding how safely to drive, rational people compare, perhaps unconsciously, the marginal benefit from safer driving to the marginal cost. As a result, they drive more slowly and carefully when the benefit of increased safety is high. For example, when road conditions are icy, people drive more attentively and at lower speeds than they do when road conditions are clear.

Consider how a seat belt law alters a driver's cost-benefit calculation. Seat belts make accidents less costly because they reduce the likelihood of injury or death. In other words, seat belts reduce the benefits of slow and careful driving. People respond to seat belts as they would to an improvement in road conditions—by driving faster and less carefully. The result of a seat belt law, therefore, is a larger number of accidents. The decline in safe driving has a clear, adverse impact on pedestrians, who are more likely to find themselves in an accident but (unlike the drivers) don't have the benefit of added protection.

At first, this discussion of incentives and seat belts might seem like idle speculation. Yet in a classic 1975 study, economist Sam Peltzman argued that auto-safety laws have had many of these effects. According to Peltzman's evidence, these laws produce both fewer deaths per accident and more accidents. He concluded that the net result is little change in the number of driver deaths and an increase in the number of pedestrian deaths.

Peltzman's analysis of auto safety is an offbeat and controversial example of the general principle that people respond to incentives. When analyzing any policy, we must consider not only the direct effects but also the less obvious indirect effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior.

case study The Incentive Effects of Gasoline Prices From 2005 to 2008 the price of oil in world oil markets skyrocketed, the result of limited supplies together with surging demand from robust world growth, especially in China. The price of gasoline in the United States rose from about $2 to about $4 a gallon. At the time, the news was filled with stories about how people responded to the increased incentive to conserve— sometimes in obvious ways, sometimes in less obvious ways.

Here is a sampling of various stories:

“As Gas Prices Soar, Buyers Are Flocking to Small Cars” “As Gas Prices Climb, So Do Scooter Sales” “Gas Prices Knock Bicycles Sales, Repairs into Higher Gear” “Gas Prices Send Surge of Riders to Mass Transit”

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“Camel Demand Up as Oil Price Soars”: Farmers in the Indian state of Rajasthan are rediscovering the humble camel. As the cost of running gas-guzzling tractors soars, even-toed ungulates are making a comeback. “The Airlines Are Suffering, but the Order Books of Boeing and Airbus Are Bulging”: Demand for new, more fuel-efficient aircraft has never been greater.

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The latest versions of the Airbus A320 and Boeing 737, the single-aisle workhorses for which demand is strongest, are up to 40 percent cheaper to run than the vintage planes some American airlines still use. “Home Buying Practices Adjust to High Gas Prices”: In his hunt for a new home, Demetrius Stroud crunched the numbers to find out that, with gas prices climbing, moving near an Amtrak station is the best thing for his wallet. “Gas Prices Drive Students to Online Courses”: For Christy LaBadie, a sophomore at Northampton Community College, the 30-minute drive from her home to the Bethlehem, Pa., campus has become a financial hardship now that gasoline prices have soared to more than $4 a gallon. So this semester she decided to take an online course to save herself the trip—and the money. “Diddy Halts Private Jet Flights Over Fuel Prices”: Fuel prices have grounded an unexpected frequent-flyer: Sean “Diddy” Combs…. The hip-hop mogul said he is now flying on commercial airlines instead of in private jets, which Combs said had previously cost him $200,000 and up for a roundtrip between New York and Los Angeles. “I'm actually flying commercial,” Diddy said before walking onto an airplane, sitting in a first-class seat and flashing his boarding pass to the camera. “That's how high gas prices are.”

Many of these developments proved transitory. The economic downturn that began in 2008 and continued into 2009 reduced the world demand for oil, and the price of gasoline declined substantially. No word yet on whether Mr. Combs has returned to his private jet.

Quick Quiz Describe an important trade-off you recently faced. • Give an example of some action that has both a monetary and nonmonetary opportunity cost. • Describe an incentive your parents offered to you in an effort to influence your behavior.

1-2 How People Interact The first four principles discussed how individuals make decisions. As we go about our lives, many of our decisions affect not only ourselves but other people as well. The next three principles concern how people interact with one another.

“For $5 a week you can watch baseball without being nagged to cut the grass!”

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1-2a Principle 5: Trade Can Make Everyone Better Off You may have heard on the news that the Chinese are our competitors in the world economy. In some ways, this is true because American and Chinese firms produce many of the same goods. Companies in the United States and China compete for the same customers in the markets for clothing, toys, solar panels, automobile tires, and many other items.

Yet it is easy to be misled when thinking about competition among countries. Trade between the United States and China is not like a sports contest in which one side wins and the other side loses. In fact, the opposite is true: Trade between two countries can make each country better off.

To see why, consider how trade affects your family. When a member of your family looks for a job, she competes against members of other families who are looking for jobs. Families also compete against one another when they go shopping because each family wants to buy the best goods at the lowest prices. In a sense, each family in an economy competes with all other families.

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Despite this competition, your family would not be better off isolating itself from all other families. If it did, your family would need to grow its own food, make its own clothes, and build its own home. Clearly, your family gains much from its ability to trade with others. Trade allows each person to specialize in the activities she does best, whether it is farming, sewing, or home building. By trading with others, people can buy a greater variety of goods and services at lower cost.

Countries as well as families benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. The Chinese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they are our competitors.

1-2b Principle 6: Markets Are Usually a Good Way to Organize Economic Activity The collapse of communism in the Soviet Union and Eastern Europe in the 1980s was one of the last century's most important changes. Communist countries operated on the premise that government officials were in the best position to allocate the economy's scarce resources. These central planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well-being for the country as a whole.

Most countries that once had centrally planned economies have abandoned the system and are instead developing market economies. In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self-interest guide their decisions.

market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

At first glance, the success of market economies is puzzling. In a market economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Yet despite decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economic activity to promote overall economic well- being.

In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith made the most famous observation in all of economics: Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes. One of our goals in this book is to understand how this invisible hand works its magic.

As you study economics, you will learn that prices are the instrument with which the invisible hand directs economic activity. In any market, buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply. As a result of the decisions

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that buyers and sellers make, market prices reflect both the value of a good to society and the cost to society of making the good. Smith's great insight was that prices adjust to guide these individual buyers and sellers to reach outcomes that, in many cases, maximize the well-being of society as a whole.

Smith's insight has an important corollary: When a government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand's ability to coordinate the decisions of the households and firms that make

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I

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up an economy. This corollary explains why taxes adversely affect the allocation of resources: They distort prices and thus the decisions of households and firms. It also explains the great harm caused by policies that directly control prices, such as rent control. And it explains the failure of communism. In communist countries, prices were not determined in the marketplace but were dictated by central planners. These planners lacked the necessary information about consumers' tastes and producers' costs, which in a market economy is reflected in prices. Central planners failed because they tried to run the economy with one hand tied behind their backs—the invisible hand of the marketplace.

1-2c Principle 7: Governments Can Sometimes Improve Market Outcomes If the invisible hand of the market is so great, why do we need government? One purpose of studying economics is to refine your view about the proper role and scope of government policy.

One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources. A farmer won't grow food if she expects her crop to be stolen; a restaurant won't serve meals unless it is assured that customers will pay before they leave; and an entertainment company won't produce DVDs if too many potential customers avoid paying by making illegal copies. We all rely on government-provided police and courts to enforce our rights over the things we produce —and the invisible hand counts on our ability to enforce our rights.

property rights the ability of an individual to own and exercise control over scarce resources

FYI Adam Smith and the Invisible Hand

t may be only a coincidence that Adam Smith's great book The Wealth of Nations was published in 1776, the exact year in which American revolutionaries signed the Declaration of

Independence. But the two documents share a point of view that was prevalent at the time: Individuals are usually best left to their own devices, without the heavy hand of government guiding their actions. This political philosophy provides the intellectual basis for the market economy and for free society more generally.

Why do decentralized market economies work so well? Is it because people can be counted on to

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treat one another with love and kindness? Not at all. Here is Adam Smith's description of how people interact in a market economy:

Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them …. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.

Adam Smith

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens ….

Every individual… neither intends to promote the public interest, nor knows how much he is promoting it…. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Smith is saying that participants in the economy are motivated by self-interest and that the “invisible hand” of the marketplace guides this self-interest into promoting general economic well-being.

Many of Smith's insights remain at the center of modern economics. Our analysis in the coming chapters will allow us to express Smith's conclusions more precisely and to analyze more fully the strengths and weaknesses of the market's invisible hand.

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Yet there is another reason we need government: The invisible hand is powerful, but it is not omnipotent. There are two broad reasons for a government to intervene in the economy and change the allocation of resources that people would choose on their own: to promote efficiency or to promote equality. That is, most policies aim either to enlarge the economic pie or to change how the pie is divided.

Consider first the goal of efficiency. Although the invisible hand usually leads markets to allocate resources to maximize the size of the economic pie, this is not always the case. Economists use the term market failure to refer to a situation in which the market on its own fails to produce an efficient allocation of resources. As we will see, one possible cause of market failure is an externality, which is the impact of one person's actions on the well-being of a bystander. The classic example of an externality is pollution. When the production of a good pollutes the air and creates health problems for those who live near the factories, the market left to its own devices may fail to take this cost into account. Another possible cause of market failure is market power, which refers to the ability of a single person or firm (or a small group) to unduly influence market prices. For example, if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self-interest in check; she may take advantage of this opportunity by restricting the output of water so she can charge a higher price. In the presence of externalities or market power, well-designed public policy can enhance economic efficiency.

market failure a situation in which a market left on its own fails to allocate resources efficiently externality the impact of one person's actions on the well-being of a bystander market power the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Now consider the goal of equality. Even when the invisible hand yields efficient outcomes, it can nonetheless leave sizable disparities in economic well-being. A market economy rewards people according to their ability to produce things that other people are willing to pay for. The world's best basketball player earns more than the world's best chess player simply because people are willing to pay more to watch basketball than chess. The invisible hand does not ensure that everyone has sufficient food, decent clothing, and adequate healthcare. This inequality may, depending on one's political philosophy, call for government intervention. In practice, many public policies, such as the income tax and the welfare system, aim to achieve a more equal distribution of economic well-being.

To say that the government can improve on market outcomes at times does not mean that it always will. Public policy is made not by angels but by a political process that is far from perfect. Sometimes policies are designed simply to reward the politically powerful. Sometimes they are made by well- intentioned leaders who are not fully informed. As you study economics, you will become a better judge of when a government policy is justifiable because it promotes efficiency or equality and when it is not.

Quick Quiz Why is a country better off not isolating itself from all other countries? • Why do we have markets, and according to economists, what roles should government play in them?

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1-3 How the Economy as a Whole Works

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