Free Enterprise in a Mixed Economy

Market Economy  Characteristics 1.Private Property 2.Self-interest 1.Motivating factor to express free choices and enterprise 3.Freedom of Enterprise and Choice 4.Competition 1.It diffuses power and it serves as a regulatory mechanism

Market Economy  Characteristics continued 5.Markets and Prices 6.Reliance on Technology and Capital Goods Creates efficiency 7.Specialization 8.Use of Money Bartering doesn’t work 9.Limited Government— “Invisible Hand”

5 Questions for a modern day economy 1.What will be Produced 2.How will it be Produced 3.Who will get the Output Plus two new questions 4.How will the system Accommodate Change 5.How will the system Promote Progress

What happened to the Command Systems?  Lack of Coordination  Planners (government) had to establish production targets and provide all the inputs necessary for the production and delivery of goods (bureaucracy); the measure of success was quantitative, not qualitative  Lack of Incentives  Why work hard when I get nothing in return  Why produce something when I don’t get to keep it

Circular Flow revisited Households  116 million+ households today  Primary suppliers of resources and biggest spenders As income receivers they earn rents, interests, profits and wages make up bulk of income As spenders, taxes make up 14% of household incomes and savings if certain criteria is met 50% of our personal consumption is spent on services)

Circular Flow Businesses  Sole Proprietorship  Easy to organize, one owner, keep all profits  But too risky, along limitations of one person  Partnership  Two better than one  But a liability issue, partners disagree, limited money  Corporations  Unlimited life, limited liability  Difficulty to form and lots of taxes

The Public Sector in the circular flow  Government serves 5 basic functions in our “market” economy  Legal and Social Framework  Establishes laws and regulations to ensure private property rights  Provides a system of order and standards, along with enforcement rule  Pure Food and Drug Act, OSHA,  Too many rules, however, can stifle growth

Public Sector continued  Maintain Competition  Monopolies can ruin a market economy, therefore government is needed to regulate and minimize such behavior Some industries have natural monopolies  Redistribute Income  The market economy creates an unequal society, thus government steps into help those left behind Transfer payments—welfare, Medicaid, food stamps Market intervention—price floors and ceilings Taxation—progressive income tax payment based on marginal tax rate

Public Sector continued  Reallocation of Resources  Market failure occurs when the wrong resources are being allocated  Spillovers—when certain benefits or costs escape the buyer and seller and it effects parties other than the immediate buyer and seller (spillover costs and benefits) (Costs) Pollution exampleexample Government corrects for such problems with legislation or taxes (Benefits) Education, immunization Government corrects for this by a) subsidizing customers, b) subsidizing suppliers, c) providing on their own  Stabilize Economy  Working to achieve full employment of all resources and control prices  Unemployment and Inflation are controlled by the government through various means called fiscal policy

Circular Flow with the government

Problems and Controversies  Obviously, the level of government involvement in the economy has mixed reviews