MGT Notes

Reference, ‘Principles of Economics,’ by N. Gregory Mankiw, 3e, Pg 10

Although the ‘invisible hand’ facilitates the market economy, the government can play a role in protecting its intended functioning. As an example, the government can enforce people’s rights (such as property rights) through police and courts. If these rights are not protected, there is reduced motivation for participation in the market economy.

Government policies can also work towards promoting efficiency and equity in the markets. In the case of market failure (where the market does not produce an efficient allocation of resources) due to externalities (the impact of one person’s actions on a bystander), public policy can seek to alleviate instances of inefficiency. Also, of importance to protect is market power, where a single person or a small group can impact market prices unduly. In this way, a well-designed public policy can enhance efficiency.

Polices can also promote equity by ensuring the public has access to resources that are not the sole function of the invisible hand, such as public welfare.