Chapter 3
Social Economy – a.k.a.
Command Economies – an economy in which the major economic questions of what,
how and for whom to produce are determined by a government representing the
interests of the entire society.
What to Produce? we already know through our class
discussions that this question is answered by the government.
X Central
Planning Committee
(CPC)– “experts” who pool their knowledge in order to answer the economic
questions.
X Decisions
– about what goods
and services will be produced are based on what the CPC thinks will benefit the
entire society.
X Social
Choice – decision
making by the government in the interest of society.
Is there a variety of products in this
type of economic system?
What about quality?
Do you think that products in this
market go through the typical product life cycle that U.S. products go through?
Why/Why not?
Do consumers have any choices when
purchasing a product?
How to Produce?
We know that businesses in the United
States produce products with the most efficient use of resources in order to
maximize profits. Obviously, the
government of command economies makes the decisions on “How to Produce” as
well. What does this imply for the
consumers/businesses of these countries?
X
CPC – decides which
producers will produce what goods and services. Resources are allocated to producers selected by the
government.
X
Quotas – a predetermined
number of items that must be produced is set by the CPC.
Do producers in a command economy risk
failure in the market?
Do these producers risk going out of
business do to inefficient processes?
Do these producers realize a profit
incentive?
For Whom to Produce?
In the United States this question is
answered simply by saying that whom ever can afford the product will receive
it. In a command economy “equity” is more important.
X
Equity – dealing
fairly and equally with all concerned.
Social Decision Making and Karl Marx
Karl Marx has had the most influence on the development of socialist ideals. He believed
that the “State” (entire society) should own the factors of production and make decisions about the
productions and distribution of wealth.
He
openly advocated the violent revolution by the working
class to overthrow the capitalist ruling class.
He
envisioned a classless society of equals.
Section
Two – Market Economies Use Social Choice
In
market economies such as the U.S. most
economic decisions are based on individual choice in the marketplace. However, a number of important decisions are
also based on social choice.
Public Goods – are goods and services available to the whole society.
Examples include: roads, schools, national defense, and police & fire
stations.
Why does our
government provide certain goods and services but not others?
1.
Economies of scale
– sometimes producing a large quantity of items is cheaper than creating just
one. For example:
Would a
limited edition VW Beetle (only 10 made in the U.S.) be cheaper or more
expensive than a “regular” VW Beetle? Why?
Governments provide public goods because it is cheaper due to economies
of scale.
Adam Smith agreed that the government could provide some public goods
more efficiently than could individuals.
This is called the public goods
rationale.
Public roads, schools, and the army are all social “goods” provided by
the government. Imagine if we each had
to pay for a road etc…. The costs would be very high per person. Therefore, the government charges us taxes
(we all contribute a little bit) in order to use these “goods”.
Weakness
X Free rider – a person who benefits from a public good without sharing its
cost. In order to eliminate “free
riders” it is necessary to back social choices with the power of the law.
In a market
economy, who makes the social decisions?
Representative government – individuals through their votes, elect government
officials. These officials have the
power to make social decisions on behalf of the population. These representatives must make decisions
using the Decision-Making Model.
1.
Define the Problem –
during this step of the decision making model, representatives need to
consider:
X
Distribution Effects – the way the benefit or inconvenience of a social choice is distributed
among the members of society.
2.
List the Alternatives
3.
List the Criteria
–
X
Social Goals – the
goals of the entire society.
X
Social Costs –
the costs to society of a social choice.
X
Social Benefits –
the benefits received by a society from a social choice.
4.
Evaluate the Alternatives
5.
Choose the best Alternative
Social Decision Making a Real Life
Situation
Presently, there are more cars than spaces available in the
parking lot. The school has first come
first served method of allocating the spaces.
Therefore, once the spaces are filled, students have been parking their
cars in the neighborhood, disturbing the neighbors. Residents have been unable to park in front of their own
homes. The police notified the school
stating that student cars parked on residential streets will be towed beginning
next week. What should we do?
Alternatives
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