Capturing All the Costs and Benefits

The requirements that all the supply curves capture all the costs and that the demand curves capture all the benefits, guarantee that a correct cost benefits calculus can be made. For example, if an steel factory can contaminate the environment for free, the price of steel does not correctly reflect the damage that the contamination of the factory causes on the environment. On the other hand if the government forces the factory to pay the cleaning costs in a permanent way, these costs will reflect on the market price, allowing society to contemplate in an adequate way the costs and benefits of the product of the company.

Even if the four first requirements of the free markets are carried out, the forces of the markets can only achieve a social optimum if there is not interference. The fifth requirement eliminates problems such as monopolies, in which the buyers or vendors are so powerful they are able to manipulate the market price in their own favor. The sixth requirement stipulates the supply and demand should be able to determine freely the price and amount of the market, without ceilings and floors of tax prices by the government.

If the six requirements are carried out, a very nice thing occurs, the supply and demand automatically achieves the social optimum without the government or activists with social conscience having to do anything. This revelation was the base of the metaphor of Adam Smith of an invisible hand that seems to guide the markets so that they do the right thing even when no one is in charge – despite the fact that each individual in the market might only be thinking in their own interest.

So take this revelation seriously, think in your own interest and think well about the situation. This could end up promoting social optimum.

Beginner Money Investing At The Mercy of the Market Price The Fascination for Free Markets and Competition Correct Requirements for an Adequate Market Function Capturing All the Costs and Benefits