Chapter 8 The Power and Limits of Markets Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan Chapter 8 The Power and Limits of Markets Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: ©Anna Zielinska/iStockphoto

After studying this chapter, you should be able to: Describe the resource allocation and resource ownership decisions facing societies Classify the basic types of economic systems Describe the differences in types of ownership of resources Describe the differences in types of decision making about resource allocation Evaluate the tradeoffs between efficiency and equity; security and liberty Understand the concept of market failure Copyright © 2013 John Wiley & Sons, Inc.

Resource allocation and ownership decisions The resource allocation decisions of a society determine how the resources are shared among society’s citizens. The resource ownership decisions of a society determine the property rights over the resources in a society. Copyright © 2013 John Wiley & Sons, Inc.

Resource Allocation systems Command Systems use governmental regulation or central planning to allocate resources. Market Systems use decentralized interactions between buyers and sellers to allocate resources. Copyright © 2013 John Wiley & Sons, Inc.

Resource Ownership systems Socialist Systems use public property ownership. Capitalist Systems use private property ownership. Copyright © 2013 John Wiley & Sons, Inc.

TYPES OF ECONOMIC SYSTEMS Market Capitalism is an economic system that uses private property ownership and private resource allocation decisions. Command Socialism is an economic system that uses public property ownership and public resource allocation decisions. Market Socialism is an economic system that uses public property ownership and private resource allocation decisions. Command Capitalism is an economic system that uses private property ownership and public resource allocation decisions. Copyright © 2013 John Wiley & Sons, Inc.

TYPES OF ECONOMIC SYSTEMS Copyright © 2013 John Wiley & Sons, Inc.

JUDGING ALTERNATIVE ECONOMIC SYSTEMS Efficiency Market capitalist systems are quite effective at generating efficient resource allocations. The Invisible Hand is the self-regulating mechanism of market systems that generates allocation of resources based on self-interest, competition, and comparative advantage. Command socialist systems are not as well suited to generate economic efficiency. Copyright © 2013 John Wiley & Sons, Inc.

JUDGING ALTERNATIVE ECONOMIC SYSTEMS Equity Market capitalist systems are unlikely to produce equitable results. Command socialist economic systems are more likely than market capitalist systems to achieve an equitable resource allocation. Copyright © 2013 John Wiley & Sons, Inc.

JUDGING ALTERNATIVE ECONOMIC SYSTEMS Liberty (Individual Freedom) Because they rely on individual actors and individual decision-making, market based systems tend to generate more personal liberty than do command-based systems. Similarly, because they rely on private rather than public property, capitalist systems tend to provide more liberty than do socialist systems. Copyright © 2013 John Wiley & Sons, Inc.

JUDGING ALTERNATIVE ECONOMIC SYSTEMS Security Because command socialist economic systems tend to be more equitable, and because obtaining that equity involves redistribution of income from some groups to others through taxes or other policies, command socialist economic systems generate more economic security than do market capitalist economic systems. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Market Failure Market Failure - When the market generates an inefficient allocation of goods or services. Monopolies Public Goods Externalities Imperfect Information Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Market Failure Monopolies A monopoly is a market with only one seller of a good or service. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Market Failure Public Goods A public good is one where the seller cannot exclude nonbuyers from using it. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Market Failure Externalities Externalities are costs or benefits of a trade that are imposed on people outside the trade. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Market Failure Imperfect Information Imperfect information occurs when the full costs or benefits of a trade are not known to all of the parties engaged in the trade. Copyright © 2013 John Wiley & Sons, Inc.

Questions/Discussions China and many of the countries in Central and Eastern Europe are classified as “transition economies” because they are in the process of moving from centrally planned, command socialist economic systems toward market capitalist systems. What kinds of changes do you think take place for individuals and policy makers during this process?. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Key Concepts Resource allocation Market socialism Resource ownership Command capitalism Command system Invisible hand Market system Market failure Socialist system Monopoly Capitalist system Public good Market capitalism Externalities Command socialism Copyright © 2013 John Wiley & Sons, Inc.