Economic Systems and Incentives Should I require that you take notes?

Review We have to choose , WHAT to produce, HOW to produce, & FOR WHOM to produce WHAT – Silly Bands HOW – Garcia buys them FOR WHOM – Favorite students, or winner of Rock paper scissors The point, was to practice allocating (distribute according to a standard) goods There are a few ways of doing this

Types of economies Traditional Command Market Mixed

Traditional economy Goods are made and created by families, so families decide what to make, how, and for who WHAT - Food, clothing, water, shelter HOW – Family laborers, young & old FOR WHOM – Family, young & old Some trade is done locally, but the economy is subsistence based Basic minimum needs drive decisions Ex: Inuit, Aborigines

Traditional economy Advantages Disadvantages No questions about WHAT, HOW, or FOR WHOM Economy is stagnate Because you do what your parents do, your economy does not advance

Command Economy A central authority answers the WHAT, HOW, and FOR WHOM WHAT – decided by government HOW – decided by government FOR WHOM – decided by government Limits individual freedom Government exists for the people Ex: North Korea, USSR

Command Economy Advantages Disadvantages Economy can change drastically Services like health, electricity, etc. provided at little to no cost Consumers’ wants/needs can be ignored Working hard does not pay extra Large bulky government needed to drive economy Cannot easily adapt to minor problems and innovation

Market Economy Market – not a physical place, but an arrangement which allows buyers and sellers to negotiate WHAT – what consumers want and businesses make HOW – what consumers want and businesses make FOR WHOM - consumers Ideally it is complete freedom where anything goes Goods are privately owned Property rights – ownership of goods is a key idea in a market economy Also called capitalism Ex: Singapore, United States (mostly)

Basics of Capitalism Free enterprise Voluntary Exchange People are allowed to choose what they want Voluntary Exchange Trade is important but not required Private Property Protects people’s innovations Profit Incentive The reasons people go into business is for profits Competition Consumers make the choices Consumer sovereignty The customer is always right

Market Economy Disadvantages Advantages Individual freedom Adjustment to new problems/tech. is easy Variety of goods Consumer satisfaction is high Only uses productive resources The young, old and sick left out There are not enough public goods like education, health, etc. Uncertainty for workers

Mixed Economy Just like it sounds The economy is a mix of market and command. Socialism American capitalism Ex: China, Germany, United Kingdom

Government and the Economy Capitalism Socialism Communism

Incentives Matter In communist Russia, workers had to fill quotas of products which were to be divided among the public Good: The public was provided with goods for a small or nonexistent fee Bad: The incentive was not there to make extra in the case of more need; no surplus Also, bread was highly valued if sold illegally

Incentives Matter: Rhino Poaching Rhinos horns have long been valued for healing powers and for beauty Rhinos are valued because of their beauty So the governments of nations with the black rhino decided to make the trade of rhino horns and the hunting of rhinos illegal What happened to the horn trade? What happened to the price of rhino horn?

Incentives Matter: Rhino Poaching The price has gone up because it is now more dangerous Poaching rate has also gone up What can be done about this? Some government have allowed private owners to own and control the black rhinos

Incentives Matter Govt. makes horns illegal Price goes up Govt. make horns legal but private Price goes up More rhinos killed Government spends more money on protecting rhinos INCENTIVE: PROTECT RHINOS Price goes up even more Rhinos still killed, but fewer Businesses protect the rhinos INCENTIVE: PROFIT FROM RHINOS

Incentives Matter: Chile’s bus system Under the privately owned, market system, there were over 3000 bus companies Routes were confusing Consumer’s incentive is to find a good company which drives fast Drivers paid by how many people there were What is their incentive? Crowded buses Government’s response: centralize the bus system as a public service, like CUMTD

Incentives matter In order to prevent bus crashes and overcrowding of buses, Chile pays drivers based on punctuality What is the incentive for the drivers’ now? What is the incentive for consumers now?