Economic Systems & Schools of Thought

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Economic Systems & Schools of Thought

  1. 1. ECONOMIC SYSTEMS,SCHOOLS OF THOUGHT, MARKET FAILURES AND THE CANADIAN ECONOMY Introduction to Economics 1
  2. 2. Economic Systems• Who owns the resources? (Production)• How are the resources allocated? (Distribution) • What to produce? • How to produce? • For whom to produce?• Four combinations of ownership and distribution… 2
  3. 3. Four Economic Systems1. Planned or Command Economy (Socialism) • State ownership & allocation of resources • Planned quota system • No free markets • Centralized planning2. Market Socialism • The state owns the resources and means of production • But the products are sold to consumers in free markets 3
  4. 4. Four Economic Systems3. State Capitalism • Private ownership of resources • But allocation is by the state • No markets • Distribution based on government’s plan • Planned quota system4. Market Economy (Capitalism) • Resources are owned by the private sector • Allocated through free markets • No government intervention/ownership 4
  5. 5. Canada: A Mixed Economy• Private ownership and distribution in markets  most things• State ownership and distribution  education 5
  6. 6. Canada: A Mixed Economy• Public ownership with market distribution  hydro• Private ownership but state distribution  eggs/dairy 6
  7. 7. Adam Smith (1723-1790)• Classical and neoclassical economics  Free enterprise economy; market economy; capitalism  Focus on the long run• Invisible hand  Self-regulation  No shortage or surplus  Self-interest vs. social welfare• Laissez-faire• Say’s law 7
  8. 8. Adam Smith (1723-1790)• Prices and wages are flexible and adjust quickly• Efficiency  Getting the most out of society’s scarce resources  Maximizing social welfare• Main condition: competition  No one should have control over the prices  Many buyers and sellers 8
  9. 9. John Maynard Keynes (1883-1946)• Keynesian and neo-Keynesian economics  Focus on the short run  Prices and wages are sticky: slow to adjust  Takes long for surpluses and output gaps to close  Need for government intervention  Emphasize (government) expenditure 9
  10. 10. Karl Marx (1818-1883)• Marxism and communism  Competitive markets favour a minority over the majority  The poor becomes more disadvantaged and the rich becomes more privileged  The proletariat should own the added value of their work  The government should own and run the means of production to ensure equal distribution of wellbeing 10
  11. 11. Why Government Intervention?1. Protect consumers • High prices  Monopolies  Price fixing  Concentration • Sub-standard products • Hazardous products • Restriction or prohibition of certain products • Wrong information  Advertisements 11
  12. 12. Consequences of Concentration• Higher prices• Lower quantity• Fewer choices• Inferior service/ quality• Political influence 12
  13. 13. Why Government Intervention?2. Protect workers • Minimum wage • Legal age • Maximum work week  Overtime pay • Safe working environment • Unions • Discrimination 13
  14. 14. Why Government Intervention?2. Protect workers (continued) • Benefits  Statutory holidays  Vacations  Fringe benefits  Parental leaves 14
  15. 15. Why Government Intervention?3. Regulate problems created by the system • Unemployment • Inflation • Poverty • Inequitable distribution of income4. Provide social services equitably • Health care • Education 15
  16. 16. Forms of Government Intervention1. Direct ownership/provision • Infrastructure • Crown corporations2. Economic policies • Fiscal policy  Taxes & subsidies • Monetary policy • Trade policy • Incomes policy 16
  17. 17. Forms of Government Intervention3. Laws and regulations • Set standards • Licenses • Prohibitions/restrictions • Regulatory agencies 17
  18. 18. Market Failure• A market cannot exist for certain goods/services•No one would want to supply them • Ex. a lighthouse• Two conditions to analyze:1. Rivalry2. Excludability  Four combinations… 18
  19. 19. Market Failure• Problem with non-rivalry (club goods): • How much to charge? • High fixed cost, but only once  Solution: subscription/membership fee• Problem with non-excludability (common pool resources): • Free-rider problem • Tragedy of the commons  Solution: auction to a private owner 19
  20. 20. Market Failure• Public goods: both non-rival and non-excludable • Who would provide it? • How to finance?  Taxation  Intellectual property rights (patents, copyrights)• Externalities • Positive/negative  Pollution  Solution: internalize the costs → tax 20

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