Question

What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?

Answer 1

In purely competitive markets, the "invisible hand" can produce socially optimal outcomes by eliminating or avoiding factors such as monopoly, pollution, poverty, inequality of incomes, discrimination, and failure to provide insurance.

Step-by-step explanation:

In order for the "invisible hand" to produce socially optimal outcomes in purely competitive markets, certain factors must be eliminated or avoided.

These include:

1. Monopoly and imperfect competition: These situations can lead to higher prices and reduced consumer welfare. By promoting competition and preventing monopolistic practices, the invisible hand can work more effectively.
2. Pollution: Unregulated markets may result in excessive pollution, harming the environment and public health. Measures to address external costs and promote sustainable practices are essential.
3. Poverty and inequality of incomes: While markets can generate economic growth, they may not effectively distribute resources and income. Addressing poverty and inequality through social policies is crucial for socially optimal outcomes.
4. Discrimination: Markets that allow discrimination can lead to unfair outcomes. Policies that promote equal opportunities and discourage discriminatory practices are necessary.
5. Failure to provide insurance: In some cases, markets may not adequately provide essential insurance coverage. Social safety nets and regulations can help ensure access to necessary insurance and protect individuals from financial risks.