Question

The Chapter 15 module provides several video's that delve into the economic implications of income inequality, wage fairness, and social justice.

1. What are the economic implications...to voluntary exchange...to incentives?
2. Are there any "unintended consequences?"
3. As economists, how might we suggest solving any real or perceived issues

Answer 1

Voluntary Exchange : In simple language, it defines the act of buyers and sellers freely and willingly engaging themselves in market transactions. It means that the transactions are made in such a way that both the parties are better off after the process more than they were before it.

Voluntary exchange has attached to itself a number of school of thoughts and different perceptions about the importance of the such exchanges and their impact on the market efficiency.

One view is that this form of exchange has resulted in market behaving efficiently, that free trade has positive effect etc. On the other hand, some believe that voluntary exchange are more conducive to economic efficiency than that mandated by governments.

Any transaction that takes place in the market today are due to the interaction of the buyers and the sellers and thus the market demand and supply along with the price of the commodity is determined. This way, the allocation of resources in an economy are determined. Government has no role except for laying down the rules and regulations and enforcing them thus allowing market to operate efficiently. Thus, the government has no control on the goods and services exchanged in an economy and is rather determined by the interaction of the market players.

• Voluntary exchange increases the welfare of both the parties as both indulge into transactions at a point where they both maximize their profits. It never makes the agents worse off as it is voluntary and both are willingly attached to it.

However, there may be some unintended consequences attached to it when there are some hidden information or temptation of one of the parties. Since the seller has more info about the product than the buyer, he may hide some info which may lead to unintended outcome and the whole model may fail. Also things like taxes, tolls, license etc may shift the equilibrium of such a transaction.

All these things need to be taken care of and the most appropriate way of doing this is by having minimal involvement of the government so that only the market players are involved in the transaction process and the goods are exchanged without any problem thus ultimately leading to better allocation of resources in the economy and nation as a whole.

• Incentive given to a person mean that a payment or concession is made to that person to make greater output or investment.

There are a number of types of incentives provided to people in an economy starting from child incentives to labor incentives to old age incentives. All these motivate the people who are in need and are willing to do work contribute to the development of the nation and economy through one or the other way. If these incentives are success full, they can lead to increase in the business activity. This in the end leads to increase in employment and wages of the economy resulting in overall upliftment of the economy.  However, incentives can be both positive and negative. They can be monetary and non monetary.

How much the incentives are benefiting an individual or society depends on what gains or profits the person is getting from those incentives. If the person feels some personal gain, he will utilize those incentives and if he faces no such point the incentive will be wasted or ill-used.

Thus there are unintended consequences attached to incentives as well. It depends on how people perceive the notion of incentives and how they utilize them. Thus, it is better to mold incentives in favor and according to the behavior of society so that they are well utilized and contribute to the growth of the economy.