Standard Four Economics Project

Promote and secure competition in a market economy?

Protect private property rights in a market economy?

A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. If the resource is owned by the government, the agent who determines its use has to operate under a set of rules determined, in the United States, by Congress or by executive agencies it has charged with that role.

Private property rights have two other attributes in addition to determining the use of a resource. One is the exclusive right to the services of the resource. Thus, for example, the owner of an apartment with complete property rights to the apartment has the right to determine whether to rent it out and, if so, which tenant to rent to; to live in it himself; or to use it in any other peaceful way. That is the right to determine the use. If the owner rents out the apartment, he also has the right to all the rental income from the property. That is the right to the services of the resources (the rent).

Finally, a private property right includes the right to delegate, rent, or sell any portion of the rights by exchange or gift at whatever price the owner determines (provided someone is willing to pay that price). If I am not allowed to buy some rights from you and you therefore are not allowed to sell rights to me, private property rights are reduced. Thus, the three basic elements of private property are (1) exclusivity of rights to choose the use of a resource, (2) exclusivity of rights to the services of a resource, and (3) rights to exchange the resource at mutually agreeable terms.

Promote equity in a market economy?

Equity means fairness or evenness, and achieving it is considered to be an economic objective. Despite the general recognition of the desirability of fairness, it is often regarded as too normative a concept given that it is difficult to define and measure. However, for most economists, equity relates to how fairly income and opportunity are distributed between different groups in society.

Provide public goods and services in a market economy?

Public goods are those goods and services provided by the government because a market failure has occurred and the market has not provided them. Sometimes it is in our benefit to not allow for a market provision. In the case of police, national defense and public education it can be argued that private provision of these services would be less desirable for a variety of reasons.

Public goods are economic products that are consumed collectively, like highways, sanitation, schools, national defense, police and fire protection.

All members of society should theoretically benefit from the provision of public goods but the reality is that some need them more then others. For example the wealthy do not need welfare and the elderly still pay for school taxes. This leads to the inevitable argument about paying for public goods.... taxes!

What goods and services should be provided and why do we provide them? Our society, depending on locality, has provided such public goods and services as public education, sanitation, police services, fire protection, libraries, infrastructure maintenance (roads, bridges, communications networks, etc..) and street lighting. Since we live in a market economy whenever we decide to provide a good or service publicly we must answer a variety of questions such as:

  • Is its use available to all. ex. Street Lighting.
  • Does it provide for public health and safety. ex. Police, Military
  • Does it provide for the general welfare of society. ex. Education
  • Should the services be provided by both public and private means. ex. Sanitation, water.

We should always ask whether or not a good is best provided by the market. If it can be efficiently provided by private means then this reduces the tax payers load.

Some goods can be provided, or may be provided as this is often debatable, by the market but society is better served by providing the service or good publicly. Consider the case of education as an example. While it may be possible to efficiently and cheaply provide education privately, the good of society is better served by public provision.

Some goods are what we call a pure public good. These are goods which cannot easily be divided or in which people cannot be excluded from. In this case provision by these public means is necessary.

Resolve externalities and other market failures in a market economy?

Market failure occurs due to inefficiency in the allocation of goods and services. A price mechanism fails to account for all of the costs and benefits involved when providing or consuming a specific good. When this happens, the market will not produce the supply of the good that is socially optimal – it will be over or under produced.

In order to fully understand market failure, it is important to recognize the reasons why a market can fail. Due to the structure of markets, it is impossible for them to be perfect. As a result, most markets are not successful and require forms of intervention.

Reasons for market failure include:

  • Positive and negative externalities: an externality is an effect on a third party that is caused by the consumption or production of a good or service . A positive externality is a positive spillover that results from the consumption or production of a good or service. For example, although public education may only directly affect students and schools, an educated population may provide positive effects on society as a whole. A negative externality is a negative spillover effect on third parties. For example, secondhand smoke may negatively impact the health of people, even if they do not directly engage in smoking.
  • Environmental concerns: effects on the environment as important considerations as well as sustainable development.
  • Lack of public goods: public goods are goods where the total cost of production does not increase with the number of consumers. As an example of a public good, a lighthouse has a fixed cost of production that is the same, whether one ship or one hundred ships use its light. Public goods can be underproduced; there is little incentive, from a private standpoint, to provide a lighthouse because one can wait for someone else to provide it, and then use its light without incurring a cost. This problem - someone benefiting from resources or goods and services without paying for the cost of the benefit - is known as the free rider problem.
  • Underproduction of merit goods: a merit good is a private good that society believes is under consumed, often with positive externalities. For example, education, healthcare, and sports centers are considered merit goods.
  • Overprovision of demerit goods: a demerit good is a private good that society believes is over consumed, often with negative externalities. For example, cigarettes, alcohol, and prostitution are considered demerit goods.
  • Abuse of monopoly power: imperfect markets restrict output in an attempt to maximize profit.

When a market fails, the government usually intervenes depending on the reason for the failure.

Stabilize and promote growth in a market economy?

Fiscal stabilisers

Built-in automatic fiscal stabilisers, which include progressive taxes and escalating welfare payments, provide a shock absorber to stabilise an economy following an economic shock. The combined effect of these is to create fiscal drag during periods of unusually strong growth, and fiscal boost during periods of very weak growth or negative growth. Negative or positive demand side shocks can be stabilised more quickly when automatic stabilisers are built-in to the tax-benefit system.

Floating exchange rates

Floating exchange rates are also seen as an automatic stabiliser. In the event of either a negative demand or supply side shock affecting an economy, the exchange rate will fall as currency traders sell the currency, leading to a fall in export prices and an automatic increase in competitiveness. Assuming foreign demand is price elastic, export revenue will rise, and, via an upward multiplier effect, aggregate demand will bounce back.

Flexible labour markets

The third automatic stabiliser is flexible labour markets. In the events of a demand side shock, like the credit crunch, aggregate demand will fall and firms will experience a fall in demand for their products. If the labour market is inflexible, full-time workers may be made redundant, and their spending will fall. Assuming a downward multiplier effect, national income will fall further, and the economy may plunge into a recession. However, with a more flexible labour market, a number of flexible responses can occur, which stabilise the economy. For example, instead of making workers redundant, pay can be reduced so that unemployment is avoided. In addition, full-time workers can go part-time, again avoiding full-blown unemployment. Finally, a more flexible and mobile workforce can move quickly from areas or industries with low demand to areas or industries with higher demand.

Use regulations and deregulation polices to affect consumers and producers in market economy?