The Limits of the Invisible Hand

Earlier chapters have explained how the invisible hand of perfect competition would lead to an efficient allocation of resources. But this invisible-hand result holds only under very limited.conditions. All goods must be produced efficiently by perfectly competitive firms. All goods must be private goods like of bread, the total of which Can be cut up into separate slices of consumption for different individuals. so that the more I consume out of the total, the less you consume.

There can be no externalities like air pollution Consumers and firms must be fully informed about the prices and characteristics of the goods they buy and Sell If all these idealized conditions were met, the invisible hand could provide perfectly efficient production and distribution of national output and there would be no need for government intervention to promote efficiency.

Yet even in this ideal case, if there were to be a division of labor among people and regions, and if a price mechanism were to work, government would have an important role. Courts and police forces would be needed to ensure fulfillment of contracts, and nonviolent behavior, freedom theft and external aggression, and the legislated rights of property.

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