Visible Hands in the Economy:
Exercises, Problems, Essays & Discussion Questions


1. Describe in detail how the economic life of a family might be governed by a visible hand. Endow the children with a certain amount of money.

2. Does your college have "market power"? Defend your answer, paying particular attention to the degree of "exit" that students can exercise, in the short run and in the long.

3. How are problems of public goods settled among friends - that is, a society of "loyalty"? Consider for example how it is decided who will provide the car and gasoline for a trip among friends. Once the car is provided, the extra seats in it are public goods. The driver could exclude his friends from riding, but it would be socially inefficient: a commodity (namely, a ride) would be thrown away if it were empty. How is it actually done? Can this apply to larger groups?


4. Explain, using specific examples from your own country, why there is no such thing as pure capitalism (that is, a purely free market economy).

5. "Pure capitalism may be impossible because governments always find ways to intervene in their economies. But, in a perfect world, pure capitalism would rule!" Do you agree or disagree? Why?

6. "The optimal amount of pollution is of course zero." Why would an economist disagree with such a statement?

7. "The economically best solution to pollution is the creation of a market." Discuss. What is the alternative to paying people not to pollute?

8. When prices are inflexible, markets do not work as well as when they are flexible. Prove it. Use a diagram to underscore your argument. Imagine a fixed price with fluctuating demand and supply curves.

9. In recent years the Romanian economy has been in poor shape. As a result of the policies by the communist government of earlier times to increase population, the orphanages of the country are filled with healthy but unclaimed infants and children.

A. Make the case for allowing Americans to purchase orphan children from Romania.

B. Now make the case against it.

10. "Market societies are terribly unjust."

A. Make three convincing arguments in favor of this proposition.

B. Now turn the tables: "But so are non-market societies." Distinguish sharply between ideal societies and actually existing ones.


1. The price is fixed, and in some views that is a "failure" of markets. Even though there is an excess demand for the "consumption of Irish pubs", the price for getting in does not go up. You have to pay instead by literally wasting your time in the line. Somehow the scarce places in the pub have to be allocated. But as the Chicago-School supplement suggests, it's not really a "failure." It's costly to keep changing menus, for example.

2. Bayla's implicit argument is that the market for underwriters is unfair because of discrimination against her mother. The question remains why insurance companies would sustain their discriminatory practice. After all, the relatively low wages should make women like Bayla's mother more attractive as employees; a greater demand for them would pull up their wages.

3. Since marijuana can sprout up in one's own backyard, or in a ditch, or anywhere, the supply curve would shift radically to the right, and the market price before state intervention would drop to nearly zero (non-zero but still very low prices would obtain for unusually high quality and for coffee house or pub house services). Some students want to shift the demand curve up and to the right. But that makes little sense. Robitussin® is legal but you don't see people flocking toward it, or missing work in droves because of it. Likewise tequila or rum or airplane glue, in truth, more dangerous. The first and obvious benefit of legalization is gangs and drug lords would lose a major profit source, and therefore power. The War on Drugs is very expensive. Lives and money would be saved (question: we wonder how much?). Another non-trivial benefit would be conferred to medical marijuana users, such as people with stomach cancer who struggle to find an appetite. With state and local regulation and taxation the benefits would be similar to those associated with beer and liquor and tobacco: "sin taxes" mean more money for government programs, such as better roads and schools. In the next two chapters you will learn how to shift and interpret the supply and/or demand curves when a tax is imposed.

4. Likening the university to a business firm, some might favor exit as the solution to disputes. If students do not like the way freshman English is handled, they can leave. Using the analogy of a political community or a family, on the other hand, if the students do not like something going on at the university, they can also complain - stage a sit-in at the dean's office, perhaps, or write to the trustees. And using the analogy of an army, the students and staff can choose to stick to the university out of a sense of loyalty, even if things do not work out exactly as they want. Disagreements about university policy often arise from choosing different analogies. One's approach depends on whether one sees the university as a business company (exit) or a city-state (voice) or an army (loyalty).