Question

In: Economics

Why do we enter into exchanges that both parties expect to benefit? Economists will say we...

Why do we enter into exchanges that both parties expect to benefit? Economists will say we enter into these exchanges because it is in our self-interest to do so. Some will criticize this as selfishness, and they will say that selfishness is not a good foundation for an economic system. Is this true? Is there a difference between selfishness and self-interest?

Solutions

Expert Solution

We enter into exchanges that both parties expect to benefit because exchanges can create potentially win-win situations for both the parties. For example, if two countries produce according to their comparative advantage and trade the goods with each other, both the countries can consume a higher amount of both the goods, even at a lower cost. Therefore, exchange often benefits both the parties. Be it people or countries or companies, different entities have different resource endowments and different types of expertise. Therefore, practically exchange is very beneficial to increase the utility of all parties involved in the exchange.

I think there is a difference between selfishness and self-interest. Selfishness is about getting benefitted at the cost of others. A selfish act does not create a win-win situation as it only benefits one or some of the parties. Self-interest can benefit all parties. It is based on creating win-win situations for all.


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