Market Systems Unit 3

Free Market System Less government involvement Private property Profit incentive

Free Market Advantages Responsive to consumer needs Economic freedom Competition Faster growth

Free Market Disadvantages Inequity of income distribution Resources used on frivolous items Externalities Job insecurity

Role of Government in a Free Market System Regulation Public Goods

Command Market System More government involvement Communal property Community rather than personal incentives

Command Market Advantages Job security All services taken care of Big projects easier to do Wealth more evenly distributed

Command Market Disadvantages Non-responsive to consumer needs Limited choices Lines Slower growth

Mixed Systems All economies are mixed systems Economies that are more market based are called capitalist Economies that are more command based are called communist Economies in the middle are usually called socialist Typical mixed systems have government control/ownership of basic services, while consumer goods rely on the market

Game Theory The field of game theory came into being with the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. A major center for the development of game theory was RAND Corporation where it helped to define nuclear strategies Made popular by John Nash’s “Prisoner’s Dilemma”, game theory has come to dominate economic and political thinking. Game Theory studies choice of optimal behavior when costs and benefits of each option depend upon the choices of other individuals.

The Prisoners Dilemma You and an accomplice have been arrested for a crime.You are interviewed separately by the police. You can choose to remain silent, and keep your agreement with your accomplice, or you can betray your accomplice by blaming them for everything. Prisoner B Stays Silent Prisoner B Betrays Prisoner A Stays Silent Each serves six months Prisoner A serves ten years Prisoner B goes free Prisoner A Betrays Prisoner A goes free Prisoner B serves ten years Each serves five years

Pirate Game There are five rational pirates, A, B, C, D and E. They find 100 gold coins. They must decide how to distribute them The Pirates have a strict order of seniority: A is superior to B, who is superior to C, who is superior to D, who is superior to E. The Pirate world's rules of distribution are thus: that the most senior pirate should propose a distribution of coins. The pirates should then vote on whether to accept this distribution; the proposer is able to vote, and has the casting vote in the event of a tie. If the proposed allocation is approved by vote, it happens. If not, the proposer is thrown overboard on the pirate ship and dies, and the next most senior pirate makes a new proposal to begin the system again. First of all, the pirates want to survive. Secondly, the pirates want to maximize the amount of gold coins they receive and, thirdly, they like throwing other pirates overboard.

Surprising to many, the end result is A: 98 coins B: 0 coins C: 1 coin D: 0 coins E: 1 coin