Exercises: Economic systems

State the three basic questions that every economic system must answer and explain each with an example from your local area.

Explain how a market economy differs from a centrally planned economy: who decides what is produced and what role prices play in each system.

The figure shows the spectrum of economic systems, with two imaginary countries, Efed and Zora, located at different positions.

1. a) Which of the two countries is closer to central planning? Justify your answer.
2. b) Position a country where healthcare and education are public but most companies are private on the spectrum, giving your reasoning.

Explain what it means that in a market economy the productive factors (land, premises, machines) are mostly privately owned. What rights does that ownership confer and why is it important for firms to decide to invest?

Think about your neighbourhood or town: name three private businesses and three services run by the State or the town council. What conclusion do you draw about what type of economic system Ireland has?

In a market economy, prices work as signals. If the price of avocados rises sharply, explain what "message" farmers receive and what message consumers receive, and how each group will react.

In the market it is said that "consumers vote with their euros": firms produce what people are willing to buy. Explain what that phrase means and what problem it poses for those who have few euros to "vote" with.

Order these activities from most State-decided to most market-decided and justify your ordering: national defence, neighbourhood bakeries, public healthcare, and taxis with a municipal licence that sets the fares. Which seems the most "mixed" to you?

Ireland is a mixed economy. Give two examples of areas where the market decides and two where the State intervenes, and explain what justifies public intervention in the latter two.

In a planned economy, when a product is scarce, queues form at shops; in a market economy, the price rises.

1. a) Explain what rationing mechanism each system uses.
2. b) Compare what problems each generates and for whom.

For each system (market, central planning, and mixed economy), state who answers the questions of what to produce, how to produce, and for whom to produce, and give a real or fictitious example to illustrate it.

Places at the public university are allocated by cut-off grade; places at a private language academy go to whoever pays the enrolment fee.

1. a) What rationing mechanism does each institution use?
2. b) Compare one advantage and one drawback of each mechanism, thinking about efficiency and equal opportunities.

In the fictitious country of Duria, the State sets the price of bread by law below its cost. After a year there are closed bakeries, queues at dawn and a black market for expensive bread.

1. a) Explain, using the concepts from this section, the chain of problems the measure has generated.
2. b) What would the free price have done in that situation, and what alternative could protect poor families without fixing the price?

Social housing combines land provided by the council, private developers and a maximum sale price set by the government.

1. a) What problem of the free housing market is it trying to solve?
2. b) What problems can this system create (demand exceeding supply, waiting lists, homes that never reach the free market)? Analyse them.

When microchips became scarce worldwide, their price multiplied: factories expanded capacity and some customers redesigned products to use fewer chips.

1. a) Narrate the chain of signals that the price transmitted to producers and consumers.
2. b) Explain what would have happened if a government had banned the price rise: would the shortage have been solved?

Two fictitious countries: in Nerka public spending represents $48\ \%$ of GDP and in Suria $28\ \%$.

1. a) Which is closer to the public planning pole? Justify your answer.
2. b) Describe what services you would expect to find in Nerka that might be missing in Suria.
3. c) Qualify the conclusion: does more public spending mean the market decides less? Reason with an example.

In the city of Lerna, housing rent is left entirely to the market; in Urma, the city council sets prices and allocates flats via a waiting list.

1. a) Analyse an advantage and a predictable problem of each model.
2. b) Propose an intermediate system and explain why it might work better.

Two fictitious countries present the following data: Rivia — income per capita of $\text{€}\ 32,000$, high youth unemployment, and private healthcare; Talia — income per capita of $\text{€}\ 26,000$, low unemployment, and universal public services.

1. a) What does each piece of data tell you about the economic system of each country?
2. b) Argue in which one you would prefer to live as a student and as an older worker, and what criteria you use in each case.

After a major drought, the government of a country limits irrigation and sets a price cap on bottled water.

1. a) Does this imply abandoning the market economy? Reason your answer.
2. b) Evaluate the measure in terms of efficiency and equity.

A country is debating how to organise care homes for the elderly: having the State run them directly or leaving them in the hands of private companies with subsidies for families.

1. a) Analyse each option using the criteria of efficiency, equity, quality of service and the incentives of the operators.
2. b) Propose a specific mixed model and argue what role each agent plays in it.

In the fictitious republic of Ostren, the State banned free-market rents and set each factory's output and wages by decree. Ten years later: chronic shortages, poor-quality products, a widespread black market and bribeable officials.

1. a) Explain how each feature of the system breeds the next problem in the chain.
2. b) Why is it so hard to escape that dynamic once it has set in? Reason what reforms would be needed and in what order.

The government of Krasnia begins the transition from a planned economy to a market economy and approves an immediate shock therapy plan: on 1 January, it liberalises all prices and privatises large factories by selling them to their former managers, but postpones the creation of an independent judiciary, banking regulation, and opening up to foreign competition. Six months later, inflation exceeds 250 %, output collapses, and a handful of private monopolies control basic goods, setting exorbitant prices.

1. a) Diagnose the economic causes of this collapse: explain why liberalising prices and privatising without prior competition or legal certainty does not produce an efficient market, but rather extractive monopolies and inflation.
2. b) Design a chronological sequence of institutional reforms (what should be implemented before, during, and after liberalising prices) for the transition to work, justifying the role of each institution.

A political party proposes in its electoral programme to entirely privatise roads, street lighting, and courts of justice, arguing that "if the market is the most efficient mechanism for producing food and clothing, it will also be for any other public good or service."

1. a) Use the characteristics of public goods (rivalry and excludability) to predict what market failures would emerge if a private company attempted to manage a city's street lighting or national defence for profit. Why would the free market not produce them in sufficient quantities?
2. b) Analyse what would happen if courts of justice operated as private firms charging the parties to issue rulings. Justify why the State must reserve this domain for itself to enable the very functioning of the market.

Five hundred people found a colony on an uninhabited island and must decide on their economic system.

1. a) Design which activities you would leave to free exchange between neighbours and which the community council would manage (water, energy, security, allotments, trade), justifying it with the questions of what to produce, how and for whom.
2. b) What rules would you put in place so that the system does not degrade over time? Analyse the incentives your rules would create.