U.S. Economic System

Helen NaughtonDepartment of EconomicsUniversity of Montana

Economics

Economy—in Greek “Household management”

Microeconomics—study of household and firm decisions

Macroeconomics—study of country-level indicators (government interest rates, unemployment)

The Economic Questions

1. What goods and services are produced?

2. Which resources are used in production?

3. Who gets to consume the goods and services?

Economic System

The system for answering The Economic Questions:

Does the government choose what and how much is produced or is it market-driven?

Who decides which resources are used? Who decides how goods are distributed?

Traditional System

Economic decisions based on customs and beliefs handed down through generations

Command System

The economic system where government answers most of The Economic Questions for its people. Former Soviet Union North Korea

Business in a Command System

The government answers The Economic Questions: The government determines what inputs to

use The government determines the quality of

inputs The government sets employees wages The government sets business hours

Market System

The economic system where markets are allowed to operate freely: Goods and services are produced if people are

willing to pay for them in the market. Input markets drive which resources are used in

production. Those who are willing to pay for the goods and

services receive them.

Business in a Market System

I answer The Economic Questions: I determine what inputs to use I determine the quality of my inputs I set my employees wages I set my business hours

US Economic System

A little bit of each—MIXED SYSTEM! Some markets are allowed to operate freely. Some production and allocation decisions are

made by the government. Some economic decisions are made based on

tradition.

Business in a Mixed System

I and the government answer The Economic Questions: I determine what inputs to use The government determines the quality of my

inputs Minimum standards for food safety and other

health hazards (no lead in paint or gasoline). I set my employees wages The government sets the minimum wage I set my business hours The government decides if I am safe to operate

Traditional System

Command System Market System

USNorth Korea

Natives/Aborigines

Economic Systems Across Countries

It is reasonable to state that US is more market-based system than most countries overall. Yet, we could likely find specific markets where

the US government interferes more than other governments.

For example, the US government has a tradition of offering support to US steel workers to protect the industry jobs and income.

Why has the US (mostly) embraced the market

economy?

To promote efficiency To make the economic benefit/pie as big as

possible To minimize waste

Why not operate fully on the market system?

Markets do not ensure that goods and services are allocated fairly (or that everyone gets enough to eat).

Costs and benefits of the goods and services may be external to the market. A person who does not pay for fireworks can

easily enjoy the fireworks. (External benefits) A person who does not use a car can get sick

from pollution emitted by cars. (External costs)

Government’s Roles

1. Increase equity Tax income and wealth Provide goods and services to the poor

Government’s Roles

2. Provide goods with external benefits (private markets underprovide these goods)

National security Infrastructure (roads and bridges) Educated and healthy citizenry

Government’s Roles

3. Regulate goods with external costs (private markets overproduce these goods)

Ensure copper mining pays for all costs (including the cost of polluted water in the river)

Control hazardous waste disposal Charge gasoline taxes to help pay for the

external cost of air pollution from cars

Balancing Roles of the Market and the

Government

Hotly debated in the US political system

Problems with finding the balance: External costs and benefits are difficult to

measure. While redistributing income may reduce

inequality, it also lowers incentives for work (some argue especially for the highly productive).

Traditional System

Command System Market System

Thank you!