Chapter 2 Section 4 Mixed Economies

The Rise of Mixed Economies Adam Smith believed that the free market would provide the greatest benefit for consumers and raise the standard of living This is known as laissez faire Laissez Faire – the doctrine that government should not intervene in the marketplace

Reasons for Government Involvement Some needs are difficult to meet in the marketplace National defense, highway systems, education Property rights need to be protected 5th and 14th Amendments protect private property Private Property – property owned by individuals or companies Exchanges in the marketplace should be fair Laws requiring businesses to give honest information to consumers or block firms from combining to fix prices and prevent competition

Mixed Economies Most modern economies are mixed economies Mixed Economy – market based economic system in which the government is involved to some extent which varies from nation to nation

Copy this circular flow model onto page 154.

Government in the Factor Market Just as firms purchase land, labor, and capital from households in the factor market, the government does as well The U.S. government pays 2.7 million employees $152.2 billion a year for their labor State and local governments participate as well

Government in the Product Market Like households, governments purchase goods and services from firms in the product market. Governments also provide certain goods and services by combining the factor resources they bought.

Transferring Money Governments collect taxes from both households and firms They then transfer this money to businesses and individuals for different reasons The greatest of these expenses for the U.S. is Social Security

Continuum of Mixed Economies

Mixed Economies Where Government Intervention Dominates North Korea Government owns all the property and economic output; all imports are banned as is production by foreign companies China Allows more private ownership of farms and businesses Economic transition – the process of changing from one economic system to another Privatization – selling state-run businesses to individuals and allowing them to compete in the marketplace

Mixed Economies Where the Free Market System Dominates Hong Kong Once governed by Great Britain, now a special administration under China Ruled by the private sector Government protects private property and rarely interferes except when establishing wage and price controls on rent and some public services Highly receptive to foreign investment and places virtually no barriers on foreign trade Banks operate independently and foreign-owned banks have nearly all of the same rights as domestic ones

The United States Economy Free Enterprise System – characterized by individual or corporate ownership of capital goods; investments in firms are made in a free market by private decision Government keeps order, provides vital services, promotes general welfare, protects private property, limited degree of regulation High level of economic freedom, encourages foreign investment, protects some domestic industries, banking has few restrictions