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Reading. Ex.21. Answer the following questions




Before reading

Ex.21. Answer the following questions. Refer to the text if needed.

1. Why are private companies unable to provide such public services as national defense?

2. What are externalities?

3. Providing examples, explain the difference between external costs and external benefits.

4. What is intellectual property? How can it be protected by the government?

5. What is a social safety net?

6. Proponents of wealth redistribution argue that this role of government limits the concentration of wealth and maintains a wider diffusion of economic power among households. Those who oppose major redistribution programs counter that additional taxes on high-income families decrease the incentives of these groups to work, save, and invest, to the eventual detriment of the overall economy. Which opinion do you support?

7. What policies does the government use to stabilize the economy in periods of inflation and unemployment?

8. There is one more role of governments in market economies not discussed in the above text, i.e. maintaining an effective degree of competition in the economic system. Explain this role and give examples.

 

TEXT C: INVISIBLE HAND

What do you think Adam Smith meant by the “invisible hand” of the market? What does the “invisible hand” do?

 

Read the text and do the tasks following the text.

 

 

(1) By following their own self-interest in open and competitive markets, consumers, producers and workers are led to use their economic resources in ways that have the greatest value to the national economy – at least in terms of satisfying more of people’s wants. The first person to point out this fact in a systematic way was the Scottish philosopher Adam Smith, who published his most famous book, An Inquiry Into the Nature and Causes of the Wealth of Nations, in 1776. Smith was the first great classical economist, and among the first described how an economy based on a system of markets could promote economic efficiency and individual freedom, regardless of whether people were particularly industrious or lazy.

(2) Smith argued that if people are naturally good and kind, a market economy offers them a great deal of freedom to carry out their good deeds, backed up by an efficient system of production, which generates more material goods and services for them to use in doing those good works. But what if people are selfish, greedy, or lazy?

(3) Anyone who wants to enjoy more of the material goods and services produced in a market economy faces strong economic incentives to work hard, spend carefully, and save and invest. And most successful businesses have to produce good products, sell them at market prices, pay their employees market wages, and treat their customers courteously – even if that isn’t their natural way of doing things.

(4) The basic reason for that kind of change in some people’s behaviour is competition. As Adam Smith pointed out, when there are several butcher shops in a community, any butcher who is rude or tries to sell inferior meat at unreasonable prices soon loses business and income to other butcher shops. If your neighbourhood butcher is naturally friendly and benevolent, so much the better.

(5) But even customers who do not know a butcher personally don’t have to depend on such altruistic characteristics to get good service and products. The more a greedy, selfish, or lazy person wants to enjoy a higher standard of living, the more he or she will try to meet the competition and build up a large base of satisfied customers. Or as Smith described this feature of market economies, people are led “as if by an invisible hand” to work and behave in ways that use resources efficiently, in terms of producing things that other people want and are willing to pay for, even though that may have been “no part of their original intentions”.

(6) One other factor must be at work for Smith’s invisible hand to function properly: the butcher must own or rent the shop, so that he or she has the rights to its profits. Without this right to private property, and to the profits it brings, the invisible hand of competition will not motivate businesses to offer the best and most varied products at reasonable prices. Butchers who are employees of the state will view their jobs very differently than those who are in business for themselves. This fact holds true throughout the economy, whether one considers a butcher, a carpenter, a restaurant chain, or a multinational insurance company.

 

Task 1. Discuss how the example of a butcher’s character and behaviour illustrates the functioning of a free market. (paras.4 and 5)

Task 2. According to Adam Smith, what factor determines the difference between

“butchers who are employees of the state” and “butchers who are in business for themselves”? (para.6.)

Task 3. If somebody treats you courteously, is their attitude showing

a) politeness and respect;

b) caution and fear;

c) courage and bravery? (para.3)

Task 4. Having read the above text, how can you define the “invisible hand” with one or two words?

 




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