1. Explain how each of the following situations illustrates one of the five principles of interaction.
Using eBay, any student who wants to sell a used textbook for at least $30 is able to sell it to someone who is willing to pay $30.
This illustrates the concept that markets usually lead to efficiency. Any seller who wants to sell a book for at least $30 does indeed sell to someone who is willing to buy a book for $30. As a result, there is no way to change how used textbooks are distributed among buyers and sellers in a way that would make one person better off without making someone else worse off.
At a college tutoring co-op, students can arrange to provide tutoring in subjects they are good at (such as economics) in return for receiving tutoring in subjects they are struggling with (such as philosophy).
This illustrates the concept that there are gains from trade. Students trade tutoring services based on their different abilities in academic subjects.
The local municipality imposes a law that requires bars and nightclubs near residential areas to keep their noise levels below a certain threshold.
This illustrates the concept that when markets don’t achieve efficiency, government intervention can improve society’s welfare. In this case the market, left alone, will permit bars and nightclubs to impose costs on their neighbors in the form of loud music, costs that the bars and nightclubs have no incentive to take into account. This is an inefficient outcome because society as a whole can be made better off if bars and nightclubs are induced to reduce their noise.
To provide better care for low-income patients, the local municipality has decided to close some underutilized neighborhood clinics and shift funds to the main hospital.
This illustrates the concept that resources should be used as efficiently as possible to achieve society’s goals. By closing neighborhood clinics and shifting funds to the main hospital, better health care can be provided at a lower cost.
On eBay, books of a given title with approximately the same level of wear and tear sell for about the same price.
This illustrates the concept that markets move toward equilibrium. Here, because books with the same amount of wear and tear sell for about the same price, no buyer or seller can be made better off by engaging in a different trade than he or she undertook. This means that the market for used textbooks has moved to an equilibrium.