Sunday, September 4, 2011

Opportunity Cost and One Reason for 'Mixed' or 'Dual' economies

 Definition of Opportunity Cost from Invetopedia:

What Does Opportunity Cost Mean?
1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

In economics, opportunity cost refers to what you can produce at the cost of another. 

For example; you could allocate more of the budget to weapons or more to a social safety net such as medicare. In choosing one over the other you face a 'tade-off'. An economy with all resources used up for war or all resources used up for social services only exist in extremely unbalanced economies and political systems and even then don't exist in its pure forms.

In economics you seek to balance one choice against another to find a balance that is right for that particular society. Going to extremes is not something economists are supposed to do (at least not as I was taught in my O and A levels and my undergraduate economics studies... so this is 90's education onwards). Reducing taxes to a degree can stimulate the economy and even create jobs. After a certain point it ceases to be useful and that point will change for each time and situation (economics is about understanding the currant situation and formulating a solution. Politics often works in reverse, particularly new Republican economics - see True Republicanism ).

If tax cuts already havn't worked so increasing them will also not work. In other words, decreasing taxes can be useful to a point and beyond that point they are detreminental to society. No taxes (revenue for a central authority) in a society would mean no public goods, i.e. parks, no streets, no street lights, no libraries, no medicare, no social security, no military (Since no society can exist without taxes this scenario is reffered to as 'hypothetical' by economists). In the same way, raising taxes to 100% or 90% or even 75% would be too much and it would be bad for the economy.

In social applications of economics going to an extreme in either direction is generally NOT done. Politics does take extrme views, however, it is important to keep in  mind that some political policies often have nothing to do with economics and are therefore extremely bad for an economy no matter how they are framed as the 'solution to everything'.

Balancing the public good with private enterprise (so that there is, at least some, opportunity for ALL citizens is one reason why economies exist as 'mixed economies'. i.e. government and the private sector is melded together to provide social and economic growth. This will hold true unless subverted by a few (such as an aristocracy) for personal gain.

Definition of mixed economy:

An economic system in which both the private enterprise and a degree of state monopoly (usually in public services, defense, infrastructure, and basic industries) coexist. All modern economies are mixed where the means of production are shared between the private and public sectors. Also called dual economy.

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