BELL RINGER IPENCIL 1 How many people does

BELL RINGER: IPENCIL • 1. How many people does the author say actually know how to make a pencil? • 2. How many people does the author estimate are involved in some way – directly or indirectly – in the making of pencils? • 3. Of the total of all the knowledge and skills involved in creating a pencil, how much does any single person contribute to the process, according to the author? • 4. According to the author, is there any “master mind” or dictator forcing or directing everyone to do the particular jobs that are needed to make pencils? • 5. What is the “miracle” that is involved in the making of pencils? • 6. What does the author think about the government running the process of making pencils? • 7. What is the lesson about freedom and free that the author wants the reader to learn from this story

WHAT IS AN INCENTIVE? • An incentive is something that motivates someone to take a particular course of action. • i. e. Money, food, recognition, free time, etc.

HOW DO INCENTIVES RELATE TO SELFINTEREST AND UTILITY? • People respond to incentives that further their self-interest. This is based on the utility value that they attach to the incentive.

WHAT IS A DISINCENTIVE? • A disincentive is something that acts as a deterrent, which discourages or prevents an action. An example might be charging a high fee or tax for something (sin taxes, e. g. ) • Give some examples of disincentives?

EXAMPLE To discourage the consumption of tobacco, Virginia’s state government imposes an additional tax of $5 on each pack of cigarettes sold.

EXAMPLE • To reduce the amount of fights between NHL players at hockey games, the NHL imposes a fine $25 for every instance of fighting.

EXAMPLE • To improve the flow of traffic into and out of high school parking lots, Loudoun county calls for students to pay an extra $250 per year to get a parking permit.

EXAMPLE • To boost ticket sales, Redskins owner Dan Snyder offers a free Cousins jersey to the first 20, 000 fans who pass through the gates of Fed Ex field for each home game.

WHY ARE INCENTIVES AND DISINCENTIVES EFFECTIVE? • They take into account human behavior, etc…

WHY DO INCENTIVES AND DISINCENTIVES SOMETIMES FAIL? • When people game the system or when the incentives have unanticipated consequences. Or, when people are not motivated by the rewards.

WHAT IS A PERVERSE INCENTIVE? • A perverse incentive unintentionally incentivizes undesirable behavior. • i. e. Crash course video – Rat Tails. • i. e. M & M potty training • i. e. teacher telling students that when they finish the work the rest of the time is theirs.

HOW CAN WE MAKE SURE THAT THE TYPE OF INCENTIVES WE SET UP ARE EFFECTIVE? • Constant re-evaluation, interviewing people.

DIFFERENT TYPES OF ECONOMIC SYSTEMS

WHAT IS AN ECONOMIC SYSTEM? • A country’s economy or economic system is that society’s way of coordinating the production and consumption of goods and services.

WHAT ARE THE DIFFERENT GOALS OF AN ECONOMIC SYSTEM? • The way a society answers these questions will depend on what that society’s values are. Here are some possibilities. • Economic Freedom – can buy/sell/produce what you want. Freedom to open a business. • Economic Efficiency – optimal use of resources • Economic Equity – Fairness • Economic Security – Can plan for the future/lack of economic risk • Economic Stability – Things don’t change much • Economic Growth – Size of economy increases

HOW WOULD YOU RANK THESE GOALS IS IMPORTANCE (FROM 1 -7)? • Economic Freedom • Economic Efficiency • Economic Equity (or fairness) • Economic Growth • Economic Security • Economic Stability • Environmental Sustainability

THESE ARE FOUR BASIC TYPES OF ECONOMIC SYSTEM • A traditional economy • A Market economy • A command (or planned) economy • A mixed (or hybrid) economy

TRADITIONAL ECONOMY • Custom and tradition dictate what to produce, how to produce it, and for whom. • Hunting, fishing, and farming are the main economic activites in such an economy • Although traditional economies are rare in the 21 st century, some still exist (i. e. in Papua, New Guinea); also, some peoples like the Amish or the Inuit organize their lives that way

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A TRADITIONAL ECONOMY? ADVANTAGES DISADVANTAGES • Traditional economies often provide security. • Traditional economies also tend to be sustainable because they grow slowly. • Traditional economies rarely achieve the goals of economic freedom, economic growth, and a high standard of living. • They tend to emphasize equal distribution of goods and services. • Tend to be resistant to change, technology, or otherwise.

COMMAND ECONOMY • The government decides how much workers should produce. • Rulers and centralized governments impose their economic choices on society in the form of production quotas, etc. • Governmental decision-makers and planners perform the function of a market. • Some empires in the distant past had command economies. One example is Ancient Egypt. • A more recent example of a command economy is the former Soviet Union.

COMMAND ECONOMY

COMMAND ECONOMY ADVANTAGE DISADVANTAGE • Command economies can provide economic security • On the other hand, command economies have not in practice tended to work out very well. The Soviet Union’s economy, for example, failed. • Command economies also have the ability to adjust rapidly to changing circumstances. They have the ability to shift resources away from one industry to another if needed. • Command economies also limit economic freedom and provide little incentive to people to work hard. • This kind of economy also fares poorly in terms of economic efficiency. As was the case • with the Soviet Union, central planners erred greatly in terms of what society needed. Therewere many surpluses and (esp. ) shortages

MARKET ECONOMY • In this economic system, individuals decide what to produce and what to buy • Buyers and sellers exchange goods andservices on their own • An “invisible hand” seems to coordinate economic activity (Adam Smith) • The government plays little if any role in the marketplace • Property rights are very important

MARKET ECONOMY

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A MARKET ECONOMY? ADVANTAGE DISADVANTAGE • This kind of economy gives people strong financial incentives for producing goods that other people want. They tend to be more efficient than traditional or command economies and give people more economic freedom. • Market economies do not do very well in terms of economic security. • They also have historically produced more rapid economic growth than other kinds of economies. • Resource conservation is another challenge for market economies.

MIXED (OR HYBRID) ECONOMY • Both the government and individuals play important roles in deciding how much to produce and what to buy • • The government’s role in a mixed economy could vary considerably from country to country. In some its function could be limited to enforcing the laws and regulating the currency whereas in others it could involve many of the trappings of the welfare state, such as universal health care, free day care, and so on.

WHAT ARE ITS ADVANTAGES AND DISADVANTAGES? ADVANTAGE DISADVANTAGE • Mixed economies tend to be more equitable than market economies. They also have a better track record than market economies in terms of economic security and sustainability • Mixed economies can differ greatly from each other. For example , the government’s role in the economy may be fairly limited in some economies whereas in others the government may be very involved.

MIXED ECONOMY • Typically involves aspects of a market economy (competition) and government involvement (such as environmental regulations and the social safety net)