u.s. economic system helen naughton department of economics university of montana
TRANSCRIPT
Economics
Economy—in Greek “Household management”
Microeconomics—study of household and firm decisions
Macroeconomics—study of country-level indicators (government interest rates, unemployment)
The Economic Questions
1. What goods and services are produced?
2. Which resources are used in production?
3. Who gets to consume the goods and services?
Economic System
The system for answering The Economic Questions:
Does the government choose what and how much is produced or is it market-driven?
Who decides which resources are used? Who decides how goods are distributed?
Command System
The economic system where government answers most of The Economic Questions for its people. Former Soviet Union North Korea
Business in a Command System
The government answers The Economic Questions: The government determines what inputs to
use The government determines the quality of
inputs The government sets employees wages The government sets business hours
Market System
The economic system where markets are allowed to operate freely: Goods and services are produced if people are
willing to pay for them in the market. Input markets drive which resources are used in
production. Those who are willing to pay for the goods and
services receive them.
Business in a Market System
I answer The Economic Questions: I determine what inputs to use I determine the quality of my inputs I set my employees wages I set my business hours
US Economic System
A little bit of each—MIXED SYSTEM! Some markets are allowed to operate freely. Some production and allocation decisions are
made by the government. Some economic decisions are made based on
tradition.
Business in a Mixed System
I and the government answer The Economic Questions: I determine what inputs to use The government determines the quality of my
inputs Minimum standards for food safety and other
health hazards (no lead in paint or gasoline). I set my employees wages The government sets the minimum wage I set my business hours The government decides if I am safe to operate
Economic Systems Across Countries
It is reasonable to state that US is more market-based system than most countries overall. Yet, we could likely find specific markets where
the US government interferes more than other governments.
For example, the US government has a tradition of offering support to US steel workers to protect the industry jobs and income.
Why has the US (mostly) embraced the market
economy?
To promote efficiency To make the economic benefit/pie as big as
possible To minimize waste
Why not operate fully on the market system?
Markets do not ensure that goods and services are allocated fairly (or that everyone gets enough to eat).
Costs and benefits of the goods and services may be external to the market. A person who does not pay for fireworks can
easily enjoy the fireworks. (External benefits) A person who does not use a car can get sick
from pollution emitted by cars. (External costs)
Government’s Roles
2. Provide goods with external benefits (private markets underprovide these goods)
National security Infrastructure (roads and bridges) Educated and healthy citizenry
Government’s Roles
3. Regulate goods with external costs (private markets overproduce these goods)
Ensure copper mining pays for all costs (including the cost of polluted water in the river)
Control hazardous waste disposal Charge gasoline taxes to help pay for the
external cost of air pollution from cars
Balancing Roles of the Market and the
Government
Hotly debated in the US political system
Problems with finding the balance: External costs and benefits are difficult to
measure. While redistributing income may reduce
inequality, it also lowers incentives for work (some argue especially for the highly productive).