Deck 3: Economic Institutions

Question 1

What are the six major roles that the government plays in the economy? Give an example of each.

Answer 1

The six major roles the government plays in the economy are (1) providing a stable set of institutions and rules; (2) promoting effective and workable competition; (3) correcting for externalities; (4) ensuring economic stability and growth; (5) providing public goods; and (6) adjusting for undesirable market results.An example of providing stable institutions and rules is enforcing complex contractual arrangements.An example of promoting workable competition is creating and enforcing antitrust laws that prevent certain types of business behavior.An example of government correcting for externalities is restricting activities that cause pollution.An example of ensuring economic stability and growth is government policies aimed at maintaining a relatively constant price level.An example of providing public goods is providing for the national defense.An example of adjusting for undesirable market results is redistributing income through a progressive income tax.

Question 2

If a market economy is to succeed by relying on private property rights and market forces, there is an essential role for government to play in the economic system.What is it? And explain why it is essential.

Answer 2

Government must allocate and defend private property rights.If people do not respect private property, those who take property from others eliminate the incentive for others to acquire and accumulate such property, and the economic system will collapse into anarchy.

Question 3

How do global economic issues differ from national policy issues? How has the international economic community dealt with this difference?

Answer 3

Global economic issues differ from national economic issues because national economies have governments to referee disputes among players in the national economy.Global economic issues cannot be resolved that way because there is no international government.
However, nations have developed global and regional organizations whose job it is to coordinate trade among countries and reduce trade barriers.On the international level, there is the World Trade Organization (WTO) and on the regional level there is the European Union (EU).
Short Answer Questions

Question 4

How does socialism as it was practiced differ from socialism in theory?

Question 5

Briefly explain the difference between socialism and capitalism.

Question 6

What is a market economy and why is it essential that government play a role in such an economy?

Question 7

List the advantages and disadvantages of the three primary forms of business in the United States.

Question 8

List four ways in which the decisions of households are important to the economy.

Question 9

How does theoretical socialism differ from theoretical capitalism? How does it differ from socialism as it was practiced? Why are these terms no longer useful in describing today's economic systems?

Question 10

Briefly explain why socialist economic systems thwarted market forces.

Question 11

Define a market economy.

Question 12

Which economic system depends primarily on tradition to answer the "What to produce?" question? Which economic system depends on government planners to make that decision? Which economic system depends on the market to make that decision?

Question 13

The three primary forms of business are sole proprietorships, partnerships, and corporations.You are contemplating starting a business.For each of the following proposals, explain which of the three types of businesses would be most appropriate.In each case describe the advantages and disadvantages of your choice.
(a) You love drones and want to start a business creating drone pictures of people's houses and property.
(b) After a late night cram session, you and your roommate are in need of some pizza, but no restaurants are open.You decide to open an all night pizza parlor.
(c) You have an idea that will make you a billionaire before you graduate from college: a pizza delivery service - from any restaurant to any dorm.In order to make your revenue goal a reality, a local venture capital firm has informed you that you will need to nationally franchise your operation.

Question 14

There are three primary forms of businesses in the United States.List them and provide an example of each form.

Question 15

Briefly explain how the U.S.economic system has evolved from the early 1900s to today.

Question 16

What is the central tool of coordination in a market economy?

Question 17

Define consumer sovereignty.How does consumer sovereignty help determine what businesses produce? How do businesses influence consumer sovereignty?

Question 18

How does the factor market differ from the goods market?

Question 19

The U.S.economy may be thought of as consisting of three large groups.What are they? How does each group interact with the others? How does the factor market differ from the goods market? What major aspect of a modern market economy is omitted from this picture?