Question

Explain the epistemic (i.e., knowledge) and incentive issues involved in government efforts to centrally plan the efficient allocation of resources outside of private markets. Do for-profit firms, which can be viewed as “islands of central planning” embedded in markets, suffer from the same issues? What about private non-profit organizations? In each instance be sure to explain why or why not.

Answer 1

In a market economy, almost everything is owned by individuals and private businesses- not by the government. Natural and capital resources like equipment and buildings are not government-owned. The goods and services produced in the economy are privately owned. This private ownership, combined with the freedom to negotiate legally binding contracts, permits people to obtain and use resources as they choose.

Epistemic and incentive issues involved

A market economy has freedom of choice and free enterprise. Private entrepreneurs are free to get and use resources and use them to produce goods and services. They are free to sell these goods and services in markets of their choice. Consumers are free to buy the goods and services that best fill their wants and needs. Workers are free to seek any jobs for which they are qualified.

A market economy is driven by the motive of self-interest. Consumers have the motive of trying to get the greatest benefits from their budgets. Entrepreneurs try to get the highest profits for their businesses. Workers try to get the highest possible wages and salaries. Owners of capital resources try to get the highest possible prices from the rent or sale of their resources. This "invisible hand" of self-interest is the driving force of a market economy.

Competition is another important concern. Instead of government regulation, competition limits abuse of economic power by one business or individual against another. Each competitor tries to further his own self-interest. This economic rivalry means that buyers and sellers are free to enter or leave any market. It also means that buyers and sellers are acting independently in the marketplace. When businesses compete for customers, they want to sell their goods or services at the lowest possible price while still earning a profit for themselves. Consumers compete for goods and services. If the supply of a needed good or service is low, the consumer must pay a higher price. Consumers must compete to get goods or services by paying more or going out of their way to buy the products they need or want.

For-profit firms also suffer from these issues. A system of markets and prices working together are the structure of a market economy, not the central planning by government. A market brings buyers and sellers together. The wants of buyers and sellers are registered on the supply and demand sides of various markets. The outcome of these choices is a system of product and resource prices. Prices are the guideposts on which buyers and sellers make and revise their free choices in furthering their self-interests.

Competition insures greater quality and lower prices for consumers. Individuals are encouraged to take business risks to further their own economic interests, which benefit the economy as a whole. Economists Friedrich von Hayek and Milton Friedman believe that the more economic freedom that is available, the more civil and political freedoms a society will enjoy.

Some disadvantages are that only those people with resources may take part in a market economy. There is often an income gap. People with the most resources (money) keep getting richer, while people with few resources get poorer. Some services, like railroads and airlines, have problems offering their services while maintaining low prices. In these cases, government may step in to keep the services available at a reasonable cost to consumers because the service benefits the society as a whole. Some critics of market economies say that greed is the driving principle. They think that markets should not be allowed to profit while causing potential harm to the environment by using up all available resources and polluting the planet.