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 health care 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, buildings, 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 neighborhood or town: name three private businesses and three services run by the government or the city council. What conclusion do you draw about what type of economic system Spain 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 dollars": firms produce what people are willing to buy. Explain what that phrase means and what problem it poses for those who have few dollars to "vote" with.

Order these activities from most government-decided to most market-decided and justify your ordering: national defense, neighborhood bakeries, public healthcare, and taxis with a city license that sets the fares. Which seems the most "mixed" to you?

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

In a planned economy, when a product is scarce, lines form at stores; 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.

Spots at the public university are allocated by a minimum GPA or test score cutoff; spots at a private language school go to whoever pays the enrollment 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 opportunity.

In the fictitious country of Duria, the government sets the price of bread by law below its cost. After a year there are closed bakeries, lines 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?

Affordable housing combines land provided by the city, 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)? Analyze 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 the 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 apartments via a waiting list.

1. a) Analyze 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 $\$32,000$, high youth unemployment, and private health care; Talia — income per capita of $\$26,000$, 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? Explain your reasoning.
2. b) Evaluate the measure in terms of efficiency and equity.

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

1. a) Analyze 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 government 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 bribable 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 out what reforms would be needed and in what order.

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 neighbors and which the community council would manage (water, energy, security, community garden plots, 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? Analyze the incentives your rules would create.