In this chapter you will:

• Learn what the ‘invisible hand’ of market forces would do in an ‘ideal’ world;

• Find out how and why the ‘invisible hand’ does not work in fact;

• Study the distinction between efficiency and equity;

• Explore the role of property rights in the functioning of markets;

• Consider how well markets look after the environment;

• Learn that efficiency is not the same as sustainability.

In the previous chapter we studied how markets work. In this chapter we are concerned with the nature of the outcomes that markets produce. We are concerned, that is, not just with whether the economic problems facing society can be left to markets, but also with the question of whether they should be left to markets. Whereas the previous chapter was mainly about positive analysis, this one is concerned with normative questions as well. We shall see that while market outcomes can have desirable features, they cannot be relied upon to protect the environment, and there is no guarantee that they produce outcomes that are fair, or consistent with sustainability.

MARKETS AND EFFICIENCY

The economic problem facing a human society is often stated as three questions:

1. (1) Which commodities to produce and in what quantities?

2. (2) How, in terms of quantities of inputs, to produce the commodities?

3. (3) How to share the produced commodities as between the individual members of the society?