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How do different economic systems ration scarce resources? To what extent it is desirable that the government should provide merit goods and public goods?

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Introduction

ESSAY 2 How do different economic systems ration scarce resources? To what extent it is desirable that the government should provide merit goods and public goods? Scarcity, defined as the excess of human wants over what can actually be produced, is the basic economic problem that governments have to face. Nevertheless the different economic systems : Market, planned, and mixed economies, are different ways of solving this problem in a country . Human wants are unlimited. Yet the means of fulfilling human wants are limited. At one time the world can only produce a limited amount of goods and services. This is because the world only has a limited amount of resources, these can be human,(labour), natural (land and raw materials) and manufactured resources or capital. This basic economic problem had forced society to make a choice on what to produce, how to produce and for whom to produce. This choice involves the concept of opportunity cost, defined as the cost of any activity measured in terms of the next best alternative foregone. For example, if the workers on a farm can produce either 1000 tonnes of wheat or 2000 tonnes of barley, then the opportunity cost of producing one tonne of wheat is the two tonnes of barley foregone. In order to ration scarce resources an analysis on a production possibility curve is done. ...read more.

Middle

In a planned or command economy the basic resource allocation are carried out by a centralised administrative process or Central Planning Authority. It is usually associated with socialist economic system where land and capital are collectively owned. In order to solve the economic problem the State plans the allocation of resources between current consumptions and investment for the future, the output of each industry and firm, the techniques that will be used, the labour and other resources required by each industry and firm and the distribution of output between consumers. His will depend on the government's aims. It may distribute goods according to peoples needs or to act as an incentive to work harder. The advantages of the planned economy system are that production is not undertaken for profit , therefore it is argued that there is a greater likelihood of public and merit goods being produced. There is greater equality in the distribution of income and wealth. There is a more stable economic management nor unemployment or inflation. Nonetheless, wrong goods may be produced, large bureaucratic structures which can be inefficient are created and there is less competition among firms, since each firm simply responds to the instructions it receives from planners. This kind of market provides public and merit goods, which beneficiate the habitants. Production and consumption of demerit goods can be limited or prevented altogether. ...read more.

Conclusion

They internalise the externality. Other forms of encouraging positive externalities to have merit goods is by providing free recycling facilities or sponsoring an advertising campaign to promote the use of a good. A different approach is to offer the good free but ration the supply. There are also demerit goods which are though to be bad for society. The consumption of demerit goods can lead to negative externalities, which causes a fall in social economic welfare, the government intervention is important for the reduction of its consumption. They try to reduce negative externalities by laying down maximum pollution levels or even ban the pollution creating activities. Government can also give local residents the right to claim compensation if pollution levels are more than certain level. It sets taxes on the polluters so that the tax is equal to the value of externality. It also can set a limit on the amount of pollution permitted , hence if a firm emit fewer pollution it can sell its permits to other company that emits higher levels permitted. Merit goods provide positive externalities but if left wholly to the private sector it is likely that merit goods will be under-consumed. Partly this is because individuals do not understand or appreciate the social benefits that can result from consumption of education or healthcare as examples. Also demerit goods have to be controlled by government, otherwise private sectors would not have care on the social costs of the city. Public goods are left also to government assistance, because private firms don't care about anything which wouldn't give private benefits. ...read more.

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