There are many different types of economic systems used throughout the world. Some examples are socialism, communism, and capitalism. The United States has a capitalistic system.
Capitalism is an economic system where capital goods are owned privately or corporately through private investment decisions rather than state control. It is distinguished by the determination of prices, production, and distribution of goods through competitive markets.
Since the U.S. uses a capitalistic system, it stresses the use of markets for allocating goods and the effective use of resources. However, not all markets are competitive and the government does interfere in many instances.
How does the government interfere in markets?
The government can interfere by using many different tools: price floors and ceilings, regulation, anti-trust laws, taxes, tariffs, and quotas.
Price Floor – When the government sets a minimum price in the market. A great example of this is in the labor market with the minimum wage. A price floor often creates a surplus.
Price Ceiling – When the government sets a maximum price in the market. An example of this is rent control laws in New York City. A price ceiling often creates a shortage.
From the discussion on supply and demand can you show how price floors and ceilings create a shortage or surplus?
Regulation – The government can set regulations of any kind in any industry. An example would be the government regulation that states seatbelts and airbags are mandatory in the automobile industry. Regulation often creates new markets that are then ruled by capitalism.
Can you think of other government regulation that created new markets?
Antitrust Laws – The Sherman Act was established in 1890, which was the first national antitrust law to regulate monopoly and monopoly power. Other similar laws, such as the Clayton Act, followed over time. Antitrust laws are designed to promote competition. AT&T was broken up into the Baby Bells under antitrust legislation. Many large-scale mergers and acquisitions are reviewed and sometimes stopped under antitrust laws. Antitrust laws also prohibit any type of inter-company agreements that promote monopoly power.
Taxes – There are many different types of taxes: sales, excise, revenue, profit, property, etc. We all pay sales tax every time we purchase something (in NY). State and local governments determine the sales tax percent. An excise tax is a tax on each unit sold and the revenue is collected from the producer. There are many other types of taxes that we will not discuss.
Tariffs – A tariff is an additional tax on imports. Tariffs usually differ by country of origin.
Quotas – A quota is a restriction on the number of a specific type of import. In the 1980’s the U.S. had a quota on Japanese cars that led to a shortage that allowed the price of both domestic and foreign cars to be raised.