Economic Systems
In Mexico you can open a taquería and decide which dishes to sell without asking the government for permission, but the public school in your neighborhood doesn't charge you for each class. Why does the market decide some things while the government decides others? No real economy answers that question the same way, and on this page you'll see why.
The Three Questions of Every Economy
State the three basic questions that every economic system must answer and explain each with an example from your local area.
State the three basic questions that every economic system must answer and explain each with an example from your local area.
The Spectrum: Central Planning and Market Economy
Explain how a market economy differs from a centrally planned economy: who decides what is produced and what role prices play in each system.
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. a) Which of the two countries is closer…
The figure shows the spectrum of economic systems, with two imaginary countries, Efed and Zora, located at different positions.
- a) Which of the two countries is closer to central planning? Justify your answer.
- b) Position a country where healthcare and education are public but most companies are private on the spectrum, giving your reasoning.
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…
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.
Price as a Signal
In a planned economy, when a product is scarce, queues form at shops; in a market economy, the price rises. a) Explain what rationing mechanism each system uses. b)…
In a planned economy, when a product is scarce, queues form at shops; in a market economy, the price rises.
- a) Explain what rationing mechanism each system uses.
- b) Compare what problems each generates and for whom.
Rationing Mechanisms and Price Controls
A government can intervene in the market by setting a price ceiling (a cap below the market price, to protect buyers) or a price floor (a minimum above it, to protect sellers, like the minimum wage). These are forms of regulation: the government doesn't replace the market, but it changes its results.
In the city of Lerna, housing rent is left entirely to the market; in Urma, the municipality sets prices and allocates apartments via a waiting list. a) Analyze an…
In the city of Lerna, housing rent is left entirely to the market; in Urma, the municipality sets prices and allocates apartments via a waiting list.
- a) Analyze an advantage and a predictable problem of each model.
- b) Propose an intermediate system and explain why it might work better.
After a major drought, the government of a country limits irrigation and sets a price cap on bottled water. a) Does this imply abandoning the market economy? Reason your…
After a major drought, the government of a country limits irrigation and sets a price cap on bottled water.
- a) Does this imply abandoning the market economy? Reason your answer.
- b) Evaluate the measure in terms of efficiency and equity.
Mexico as a Mixed Economy
What justifies government intervention? Mainly when the market alone doesn't guarantee access to basic services (health care, education), when there are risks to the population (pollution, medications), or when there are inequalities that people want to reduce.
Mexico 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…
Mexico 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.
Two fictitious countries present the following data: Rivia — income per capita of $\$640\,000…
Two fictitious countries present the following data: Rivia — income per capita of $\$640\,000$, high youth unemployment, and private healthcare; Talia — income per capita of $\$520\,000$, low unemployment, and universal public services.
- a) What does each piece of data tell you about the economic system of each country?
- 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.
Back to the beginning: Mexico leaves the taquería to the market because the price system efficiently coordinates what is offered and what is demanded, but it uses taxes to fund public schools and health services to guarantee access for those who couldn't afford them.