Trade and Externalities
Trade theory forms part of the bedrock of economic analysis. The concept of specialization is key to understanding how to maximize an individuals or countrys wellbeing. Skills, resources, and knowledge are unequally distributed; it is the relative differences which drive trade.
The free market is not always the optimal way to allocate scarce goods and resources. Actions and choices can have unintended effects which can harm or benefit others. How to best manage these effects, known as externalities, depends on the specifics of each problem. Economists have a variety of tools to redress misallocation.
Public goods are a unique consideration, because they are a common resource which cannot be assessed an individual economic cost. Without proper management, public goods may be over-consumed and lead to degradation of resources. Geography pays an important part in public good analysis.
The week 2 overview text is adapted from Saylor.org’s ECON 201: Intermediate Microeconomics and is used under a Creative Commons Attribution 3.0 Unported license. ©2014, Saylor Foundation.
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