Questions to address:
1. Who owns what?
2. Why do people produce goods?
3. How are goods distributed?
4. What determines what goods are produced?
key questions answered in different types of markets
A Pure Capitalist Free Market
1. Private property rights— individuals and firms
2. Production for profit— profit motive
3. Voluntary exchange— laws of supply and demand
4. Free competition— anyone can decide to produce any good for sale
A Modified Free Market, eg. Canada
aims to improve unregulated free market
1. Some state-owned enterprises, ie. Crown corporations, eg. Viarail
2. Production for profit? (????) unanswered by prof
3. Some voluntary distribution (charity)
4. Sale of some goods prohibited
o some state-enforced monopolies
A Planned Economy, eg. Soviet Union in the 20 century
1. State owns all major property— no private property rights
2. Production for needs— not for profit
3. Distribution by central allocation
4. State controls what gets produced, according to a central plan
Aren’t markets irrational?
Hayek on Market Efficiency
markets convey information
prices signal shortage and surplus
profit provides incentives to produce
markets satisfy people’s wants
o only if they have the money— markets do not respond to
o markets respond to effective demand = wants backed up by
markets, by themselves, don’t always function efficiently
some goods have externalities o cost of producing certain goods is externalized— people
benefit from or are burdened by something whether or not
they paid for it
o negative externalities: costs nothing to consumer who would
rather not have them, eg. pollution
o free market oversupplies these externalities
o cheaper to make others pay the cost
o positive externalities: costs nothing to the consumer who
o public good: if provided, benefit all,