Government Enforced Rules of Exchange
The market system is based on exchanges between strangers. These exchanges are covered by implicit and explicit contracts that establish the terms of trade. For example, real-estate transactions and other business dealings are sealed with explicit contracts that specify who pays what, and when. To facilitate exchange, the government helps to enforce contracts by maintaining a legal system that punishes people who violate them. This system allows people to trade with the confidence that the terms of the contracts they enter will be met. In the case of consumer goods, the implicit contract is that the product is safe to use.
The government enforces this implicit contract through product liability or tort law. If a consumer is harmed by using a particular product, the consumer can file a lawsuit against the manufacturer and seek compensation. For example, consumers who are injured in defective automobiles may be awarded settlements to cover the cost of medical care, lost work time, and pain and suffering. The government also disseminates information about consumer products. The government requires firms to provide information about the features of their products, including warnings about potentially harmful uses of the product. For example, cigarettes have warning labels like Quitting Smoking Now Greatly
Reduces Serious Risks to Your Health.
Some cold medications warn consumers to avoid driving while taking the medication. We already know that one of the virtues of a market system competition among producers tends to keep prices low. The government uses antitrust policy to foster competition by (a) breaking up monopolies (a single seller of a product), (b) preventing firms from colluding to fix prices, and (c) preventing firms that produce competing products from merging into a single firm.
In some markets, the emergence of a single firm a monopolist is inevitable because the entry of a second firm would make both...
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