INSTITUTIONS: Students will understand that: Institutions evolve and are created to help individuals and groups accomplish their goals. Banks, labor unions, markets, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and enforced property rights, is essential to a market economy.
Students will be able to use this knowledge to: Describe the roles of various economic institutions.
Institutions play a number of roles in a market economy. Property rights help insure that people bear the costs and reap the benefits of their decisions. Property rights and contract enforcement encourage investment by assuring investors that they will reap the rewards of deferring consumption and assuming risk if these investments perform well. Limiting individual liability and allowing people to pool their investment resources through joint stock corporations also increases investment and future income.
Other institutions lower the costs buyers and sellers incur in their efforts to find each other in different kinds of markets. For example, banks match savers with borrowers; and investment banks match entrepreneurs who organize new firms with investors who provide the needed funds.
Many institutions work to promote the goals of certain interest groups. Labor union, for example, increase the negotiating power of workers in their dealings with employers.
Understanding economic institutions and the purposes they serve will help students use institutions more effectively and help them evaluate proposed new institutions or changes in the existing legal and institutional environment.
ROLE OF GOVERNMENT AND MARKET FAILURE: Students will understand that: There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also have direct or indirect effects on peoples? incomes.
Students will be able to use this knowledge to: Identify and evaluate the benefits and costs of alternative public policies, and assess who enjoys the benefits and who bears the costs.
Why does government pay private construction firms to build roads and highways? Why do the firms that build the roads not own them themselves and charge tolls to users? All kinds of goods and services are produced and distributed through private markets, so why not roads and highways, too? In flipping through the pages of the telephone directory, we observe a vast array of businesses and government agencies. Why do markets work well to supply much of what we want, while failing to produce other things we want?
Citizens should understand the limitations and shortcomings of markets and how some government policies attempt to compensate for market failures. Learning the economic as well as the political and social reasons for public sector services helps citizens make better choices about the appropriate size and scope of markets and government. It is also important that students be able to evaluate redistributive effects of government programs.