1. ECONOMIC SYSTEMS,
SCHOOLS OF THOUGHT,
MARKET FAILURES
AND THE
CANADIAN ECONOMY
Introduction to Economics
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2. Economic Systems
• Who owns the resources? (Production)
• How are the resources allocated? (Distribution)
• What to produce?
• How to produce?
• For whom to produce?
• Four combinations of ownership and distribution…
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3. Four Economic Systems
1. Planned or Command Economy (Socialism)
• State ownership & allocation of resources
• Planned quota system
• No free markets
• Centralized planning
2. Market Socialism
• The state owns the resources and means of
production
• But the products are sold to consumers in free
markets
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4. Four Economic Systems
3. State Capitalism
• Private ownership of resources
• But allocation is by the state
• No markets
• Distribution based on government’s plan
• Planned quota system
4. Market Economy (Capitalism)
• Resources are owned by the private sector
• Allocated through free markets
• No government intervention/ownership
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5. Canada: A Mixed Economy
• Private ownership and distribution in markets
 most things
• State ownership and distribution
 education
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6. Canada: A Mixed Economy
• Public ownership with
market distribution
 hydro
• Private ownership but
state distribution
 eggs/dairy
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7. Adam Smith (1723-1790)
• Classical and neoclassical economics
 Free enterprise economy; market economy;
capitalism
 Focus on the long run
• Invisible hand
 Self-regulation
 No shortage or surplus
 Self-interest vs. social welfare
• Laissez-faire
• Say’s law 7

8. Adam Smith (1723-1790)
• Prices and wages are flexible and adjust quickly
• Efficiency
 Getting the most out of society’s scarce
resources
 Maximizing social welfare
• Main condition: competition
 No one should have control over the prices
 Many buyers and sellers
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9. John Maynard Keynes (1883-1946)
• Keynesian and neo-Keynesian economics
 Focus on the short run
 Prices and wages are sticky: slow to adjust
 Takes long for surpluses and output gaps to
close
 Need for government
intervention
 Emphasize (government)
expenditure
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10. Karl Marx (1818-1883)
• Marxism and communism
 Competitive markets favour
a minority over the majority
 The poor becomes more disadvantaged and
the rich becomes more privileged
 The proletariat should own the added value of
their work
 The government should own and run the
means of production to ensure equal
distribution of wellbeing
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11. Why Government Intervention?
1. Protect consumers
• High prices
 Monopolies
 Price fixing
 Concentration
• Sub-standard products
• Hazardous products
• Restriction or prohibition of certain products
• Wrong information
 Advertisements 11

12. Consequences of Concentration
• Higher prices
• Lower quantity
• Fewer choices
• Inferior service/
quality
• Political influence
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13. Why Government Intervention?
2. Protect workers
• Minimum wage
• Legal age
• Maximum work week
 Overtime pay
• Safe working environment
• Unions
• Discrimination
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14. Why Government Intervention?
2. Protect workers (continued)
• Benefits
 Statutory holidays
 Vacations
 Fringe benefits
 Parental leaves
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15. Why Government Intervention?
3. Regulate problems created by the system
• Unemployment
• Inflation
• Poverty
• Inequitable distribution of income
4. Provide social services equitably
• Health care
• Education
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16. Forms of Government Intervention
1. Direct ownership/provision
• Infrastructure
• Crown corporations
2. Economic policies
• Fiscal policy
 Taxes & subsidies
• Monetary policy
• Trade policy
• Incomes policy
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17. Forms of Government Intervention
3. Laws and regulations
• Set standards
• Licenses
• Prohibitions/restrictions
• Regulatory agencies
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18. Market Failure
• A market cannot exist for certain goods/services
•No one would want to supply them
• Ex. a lighthouse
• Two conditions to analyze:
1. Rivalry
2. Excludability
 Four combinations…
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19. Market Failure
• Problem with non-rivalry (club goods):
• How much to charge?
• High fixed cost, but only once
 Solution: subscription/membership fee
• Problem with non-excludability (common pool
resources):
• Free-rider problem
• Tragedy of the commons
 Solution: auction to a private owner
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20. Market Failure
• Public goods: both non-rival and non-excludable
• Who would provide it?
• How to finance?
 Taxation
 Intellectual property rights (patents, copyrights)
• Externalities
• Positive/negative
 Pollution
 Solution: internalize the costs → tax
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