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CHAPTER 3
Economic Institutions
Nobody can be a great economist who is only an economistand I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.
F. Hayek
McGraw-Hill/Irwin
Economic Institutions
Economic Institutions
Socialism is an economic system based on individuals goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce
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Economic Institutions
Capitalism
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Economic Institutions
HOUSEHOLDS (Consumption)
GOVERNMENT
BUSINESS (Production)
FACTOR MARKET
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Economic Institutions
Business
Businesses are private producing units in our society Businesses in the U.S. decide what to produce, how much to produce, and for whom to produce it Businesses produce what they believe will sell and make a profit By channeling the desire to make a profit for the general good of society, the U.S. economic system allows the invisible hand to work Although businesses decide what to produce, they are guided by consumer sovereignty
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Economic Institutions
Disadvantages
Limited ability to get funds Unlimited personal liability Limited ability to get funds Unlimited personal liability (even for a partner's blunder) Legal hassle to organize Possible double taxation of income Monitoring problems
Partnership
Corporation
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Economic Institutions
Households
Households are groups of individuals living together making joint decisions Households supply the labor with which businesses produce and government governs
Economic Institutions
Government
The government plays two general roles in the economy: 1. An actor who collects money in taxes and spends that money on projects, such as defense and education
2. A referee who sets the rules that determine relations between businesses and households
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Economic Institutions
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Economic Institutions
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Economic Institutions
How choices are presented affect the choices people make and nudges take this into account
An example is the default option bias: people tend to choose whatever is presented as the default option
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Economic Institutions
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Economic Institutions
Economic Institutions
Some examples of international institutions: The United Nations is an organization designed to achieve international cooperation but it has no ability to tax or enforce its policies on its members The World Bank is a multinational, international financial institution that works to secure loans for developing countries
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