At the same time, the market cannot solve the entire economic problem. First, and most important in the present context, it cannot function effectively if there are “externalities” by which we mean situations where consumption benefits are shared and cannot be limited to particular consumers , or where economic activity results in social costs which are not paid for by the producer or the consumer who causes them. Second, the market can respond only to the effective demands of consumers as determined by the prevailing state of income distribution, but society must also judge whether this is the distribution it wants. Third, there are problems of unemployment, inflation, and economic growth which do not take care of themselves automatically. As was shown in Chapter 1, these are the three major areas where budget policy comes into play. This chapter deals with the first, or allocation, aspect.
At the same time, the market cannot solve the entire economic problem. First, and most important in the present context, it cannot function effectively if there are “externalities” by which we mean situations where consumption benefits are shared and cannot be limited to particular consumers , or where economic activity results in social costs which are not paid for by the producer or the consumer who causes them. Second, the market can respond only to the effective demands of consumers as determined by the prevailing state of income distribution, but society must also judge whether this is the distribution it wants. Third, there are problems of unemployment, inflation, and economic growth which do not take care of themselves automatically. As was shown in Chapter 1, these are the three major areas where budget policy comes into play. This chapter deals with the first, or allocation, aspect.
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