Economics

According to Burrow, Verard and Kleindl (2007), “a market economy is an economic system in which individual buying decisions in the marketplace together determine what, how, and for whom goods and services will be produced.” Hence in any hypothetical pure market economy, the government of the day does not take an active role in deciding what products the citizenry should buy and in what quantities. A pure market economy is however taken to be a theoretical ideal. Burrow, Verard and Kleindl (2007) on the other hand note that “a command economy is an economic system in which a central planning authority, under the control of the country’s government, owns most of the factors of production and determines what, how, and for whom goods and services will be produced.” In such an economic system, the government of the day largely dictates the mode of utilization of the various factors of production. In my opinion, the United States should move closer to a pure market economy. My assertion in this case is based on a number of key considerations.

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To begin with, there are several adverse consequences of government interference in the functioning of market forces. In my opinion, a shift towards a command economy in the case of the U.S. would inevitably bring about some inefficiency in regard to the allocation of capital and goods. For instance, were the U.S. government to embrace price controls so as to shape buyer and producer decisions, efficiency in both production and consumption would decrease. Other consequences that would follow include capital resources mismanagement, overproduction as well as shortages of some goods etc. Further, in an advanced industrialized country like the U.S., the movement towards a command economy which is often characterized by a high degree of centralization and rigidity can have adverse effects on the organization the economy. Hence in this case, the U.S. would be better-off if it moved closer to a pure market economy as opposed to a command economy.

Subject 2

In a way, China’s path of transformation from a planned economy to a market economy has largely been remarkable. However, the transition has brought with itself quite a number of issues that may need to be looked into. For instance, the transition has occasioned the need for reforms in both competitive policy and regulation. Further, the Chinese government may now need to firmly deal with issues touching on corruption so as to stay on track with its transition agenda. In my opinion, the existing state owned enterprises should be transformed so as to pave way for the promotion of private enterprises. These largely relates to governance of enterprises. In regard to the promotion of free enterprises, the government may need to establish a more . This will go a long way towards stamping out any political or ideological discrimination against private entities going forward.

China could also seek to contain corruption and counterfeiting by further ensuring that a number of issues including but not limited to uniformity, predictability and transparency of the rule of law are addressed as a matter of urgency. In this case, taking into consideration the specifics of the transition of China’s economy towards the market end, the rule of law should be tailored to undertake key economic roles including the creation of a level playing field in regard to competition, the enforcement of contracts, protection of private property rights etc. This in addition to reining on counterfeiting and corruption will help bring down transaction costs. It is also important in this context to note that with the transition, the Chinese economy will continue to advance further towards full integration within the global economy. With this in mind, the need for a transparent legal framework offering protection to property rights amongst other things cannot be overstated.

Part 2

Subject 1

The need for price controls is in most cases understandable. However, it is important to note that in some cases, price controls do protect some groups while hurting others in the process. Hence with that in mind, price controls including minimum wages and rent controls do have some costs as well as benefits. To begin with, as a result of evasion, price controls may not always work as they are intended to work. For instance, when it comes to rent controls, there could exist some incentives for consumers to evade the same. In the case of a rent-controlled building, we could have a consumer paying the superintendent of the same a bribe on the side so as to gain access to the building. This effectively defeats the purpose of such price controls. Further, rent controls could create a shortage of housing as investors seek to invest their money in alternative avenues in the search for greener pastures. However, rent controls may be of much use when it comes to protecting tenants from unscrupulous landlords out to hike the rent payable far beyond the ‘ideal’ or actual market rates.

In regard to minimum wages, the same could end up bringing about unemployment mainly amongst workers considered unskilled. For instance, it could be an uphill task for a worker producing 10$ per hour worth of goods to secure employment if the law prescribes a minimum wage of 12$ per hour. Minimum wage laws could also end up hurting the of employees. In this case, employers could seek to slash some fringe benefits including but not limited to , paid leaves etc. so as to comply with minimum wage requirements. In other cases, companies could choose to lay off employees based on the higher labor expenses occasioned by the minimum wages. However, minimum wages could be used as a stimulant to the economy in which case employees have more disposable income hence enabling them to demand more goods and services. Further, minimum wages do enhance the basic quality of life amongst the citizenry.

Subject 2

Sometimes, the move by governments to impose prices so as to protect or assist some consumer or producer groups ends up bringing about some unintended consequences. To begin with, price controls can bring about serious shortages of the concerned product in the market. To highlight this, I will take into consideration a hypothetical example of roofing material. Should the government set a price ceiling of roofing material at price X, this will mean that suppliers of the affected product can’t charge the price dictated by the free-market (i.e. price Y). In such a case, some producers of the said roofing material could drop out of the market citing losses as the cost of labor, production, etc. remains unchanged. This inevitably reduces the supply of the said roofing material. On the other hand, consumers could demand more of the product given that it now goes for less. In this case, the increase in demand could be occasioned by the reduction in building costs hence making more would-be up their own apartments. These two scenarios i.e. A decrease in the quantity supplied and an increase in the level of demand is what will bring about the shortage of the roofing material.

Yet another unintended consequence of imposing prices through price controls is the creation of a black market (Baumol and Blinder, 2011). Using the example I have highlighted above, those who discover they can’t obtain the roofing material because of the shortage may opt for the black market. It is important to note that most suppliers who in one way or the other gain access to products in short supply may seek to sell the same illegally at a higher price than the set price. In some instances, this price could be higher than that which could have been charged in a free market. Thus using the above example, an individual could be forced to buy the roofing material from the black market at a much higher price.

References

Baumol, W.J. & Blinder, A.S. (2011). Economics: Principles and Policy. Cengage Learning.

Burrow, J.L., Everard, K.E. & Kleindl, B. (2007). Business Principles and Management. Cengage Learning.