Chapter 3 

Class notes 

Making Social Decisions

 The social economy aka command economy are major economic decisions made by the government. Social choice is decision making by the government on behalf of the entire society. 

Social Decisions and the Three Economic Questions:

  1. What to produce? – Sometimes a governmental planning committee determines that certain products must be produced for the good of society. For example, the US government required that the Bayer Corporation make so many units of Cipro prior the threat of anthrax. This was not a profit generating proposition for Bayer, and yet the government required it if Bayer was to continue to operate with US orders. The government required this for the good of the society. When the anthrax scare permeated the country, the availability of cipro help the society.
  1. How to produce? – “Central planning authorities decide which producers will produce what goods and services.” In an economy such as ours, these decisions are often determined by government contracts. For example if Boeing were in financial trouble, a committee might favor Boeing in the granting of its next governmental contract for goods.
  1. For whom to produce? – In a social economy, the products and services are supposed to be distributed equally. Equity is means dealing fairly and equally with all concerned. All members of society are supposed to be given a fair share…”

Karl Marx

Marx is the best known social decision economist and philosopher. He surmised that socialism would be the natural evolution of capitalism. After the invisible hand wipes out so many businesses and people through capitalistic decision making, the people will reject capitalism and favor a socialist economy.

[Note: communism (small case) is not the same as Communism (capital C)]

 Social Choice in Market Economies

Public goods are services and goods provided by the government for the entire society. Items such as roads, schools, police, fire, military are all socially provided by the government. Since the government is supplying these services for everyone (macro), individual people or businesses need not need not make roads for themselves. This offers society a substantial savings called economies of scale which suggests that services and goods become cheaper when produced on a large/macro scale rather than on an individual/micro scale. Eg. The Internet.

A person who benefits from a public good without sharing in its costs is a free rider. 

Most people think the welfare suffers from a free rider problem. That is, most people think that people on welfare take advantage of the situation and receive governmental assistance while providing nothing in return. Hence “welfare reform” was created so that welfare recipients are able to “give back” to the system. However, welfare reform is not without its problems. See the following news story.

 Effective Social Decisions

We have a representative form of government. That means we vote for people who will make social decisions on our behalf. However, no single official will be able to make decisions that totally represent our individual views. 

When making social decisions follow the same 5-step decision making process used for individual decisions.