How traditional, command, market and mixed economies decide what to make

Grade 12 Social Studies Worksheet - Challenge Me

Circle the best answer.

1. Read this first

   Use this

   Cards A to D on Hollin (example figures, made up for practice). Card A, "Bread under a price cap". Before the cap, bakers sold 10,000 loaves a day at $4. The council caps the price at $2. At $2, shoppers want 14,000 loaves a day and bakers make 6,000. Shoppers queue about 1 hour a loaf, and some loaves are resold out of sight for $5. Card B, "What an hour is worth". A typical worker in Hollin earns $15 an hour; students and retirees value an hour at about $5. Card C, "Streetlights". On average residents value new streetlights at $30 a year each; the lights cost $20 a resident a year, and no one can be kept from the light. A private seller asking $20 a year signed up 15 percent of residents. Card D, "A heating voucher". Low-income households get a $300 voucher for heating oil each winter. Oil sellers cannot quickly add supply, and in the first winter the price of a household's winter oil rose $250 for every buyer.

2. 1.

   Jun writes one claim about card A's cap for a debate. Which claim do cards A and B support best?

   • The cap made bread cheaper in Hollin: shoppers now pay $2 instead of $4 for each loaf
   • The cap cut loaves made from 10,000 to 6,000 and replaced price rationing with queues and resale
   • The cap cut the bread made by 8,000 loaves a day, the gap between the 14,000 wanted and 6,000 made
   • A cap like Hollin's is unfair to bakers, so price caps on bread are wrong in principle
3. 2.

   A student claims card A's $5 resale price shows that bread now costs more than before the cap. Ari tests the claim. What is the best verdict?

   • Not shown: the price is capped at $2, so no loaf in Hollin can change hands for more than $2
   • Not shown: bakers' costs did not change, so the true cost of a loaf is still $4
   • Shown: the $5 resale price is above the old $4, so shoppers now pay more for bread than before
   • Partly shown: loaves bought on resale cost $5, above $4, but queuers pay $2 plus their time
4. 3.

   Milo reads card C. Which claim about Hollin's streetlights do the cards support best?

   • Markets cannot supply anything people value, since just 15 percent signed up for the lights
   • Residents do not want streetlights, since 85 percent declined to pay $20 a year for them
   • The lights should not be built, since one seller could not cover the cost from 15 percent of residents
   • The lights are worth more than they cost, yet anyone can enjoy them unpaid, so few sign up
5. 4.

   With the cap on card A, a loaf costs $2 plus the wait. Pia weighs the full cost to different shoppers using card B. Which judgment fits best?

   • The cap raises the amount of bread, since 14,000 loaves a day are now wanted in Hollin
   • Shoppers gain $2 a loaf, since the cap halves the price of bread from $4 to $2
   • A loaf costs a worker about $17 with the wait and a student about $7, so the cap favors spare time
   • Workers gain most, since they earn $15 an hour and can most easily afford to queue for each loaf
6. 5.

   Kira looks for the policy that best fixes the streetlight problem on card C. Which policy is it, and who bears the cost?

   • Leave it to the seller, since the 15 percent who signed up at $20 a year pay the whole cost
   • Ban the private seller, since a market that signs up 15 percent has failed for good
   • A $20 tax on each resident: on average each gains $30 of light, though some value it below $20
   • Charge each home by the light that reaches it, since price signals work for streetlights as for bread

7. Use this

   Cards A to D on planning, prices and market failure (cards A and B are exact excerpts; card C is a summary in our words; card D is made up for practice). Card A, "F. A. Hayek, 'The Use of Knowledge in Society' (American Economic Review, 1945)". Excerpt 1: "The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess." Excerpt 2: "We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid." Excerpt 3, on a new use for tin or a lost source of it: "It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce." Card B, "A. C. Pigou, The Economics of Welfare (4th edition, 1932), Part II, Chapter IX". Excerpt, on smoke from factory chimneys: "… this smoke in large towns inflicts a heavy uncharged loss on the community, in injury to buildings and vegetables, expenses for washing clothes and cleaning rooms, expenses for the provision of extra artificial light, and in many other ways." Card C, "Market socialism". Summary in our words, not a quotation: In the 1930s Oskar Lange proposed that a central planning board set prices, raising a price where goods ran short and cutting it where they piled up, while managers produced where price equaled cost. Card D, "Water in Varra (made up)". Varra's water board sets one water price for the year. In July a drought cuts the reservoir's inflow 30 percent. At the fixed price, use stays the same and the reservoir nears empty, so the board bans lawn watering and pays inspectors to enforce the ban.

8. 6.

   Card C's board would raise prices where goods ran short. Luz tests that plan against card A and the drought on card D. What is Hayek's strongest point?

   • Varra's board already sets the water price, so card D shows Lange's plan at work in full
   • A board can match any market, since it sets prices from the same knowledge that buyers and sellers already hold
   • A board that reviews prices slowly acts like Varra's: rigid prices carry less of the dispersed knowledge
   • Lange's board fails because it sets prices, and a price set by a board stops trade in the good

9. Use this

   Cards A to D on Hollin (example figures, made up for practice). Card A, "Bread under a price cap". Before the cap, bakers sold 10,000 loaves a day at $4. The council caps the price at $2. At $2, shoppers want 14,000 loaves a day and bakers make 6,000. Shoppers queue about 1 hour a loaf, and some loaves are resold out of sight for $5. Card B, "What an hour is worth". A typical worker in Hollin earns $15 an hour; students and retirees value an hour at about $5. Card C, "Streetlights". On average residents value new streetlights at $30 a year each; the lights cost $20 a resident a year, and no one can be kept from the light. A private seller asking $20 a year signed up 15 percent of residents. Card D, "A heating voucher". Low-income households get a $300 voucher for heating oil each winter. Oil sellers cannot quickly add supply, and in the first winter the price of a household's winter oil rose $250 for every buyer.

10. 7.

    Noah asks who gains from card D's $300 voucher in the first winter. Which answer fits the card best?

    • Low-income homes gain the full $300, since the voucher can be spent on their heating oil alone
    • Buyers without vouchers gain, since sellers pass the voucher money on as lower prices
    • Mostly sellers: the price rose $250, so voucher homes gain $50 and other buyers pay $250 more
    • No one gains, since the $250 price rise cancels out the $300 voucher for each household

11. Use this

    Cards A to D on planning, prices and market failure (cards A and B are exact excerpts; card C is a summary in our words; card D is made up for practice). Card A, "F. A. Hayek, 'The Use of Knowledge in Society' (American Economic Review, 1945)". Excerpt 1: "The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess." Excerpt 2: "We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid." Excerpt 3, on a new use for tin or a lost source of it: "It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce." Card B, "A. C. Pigou, The Economics of Welfare (4th edition, 1932), Part II, Chapter IX". Excerpt, on smoke from factory chimneys: "… this smoke in large towns inflicts a heavy uncharged loss on the community, in injury to buildings and vegetables, expenses for washing clothes and cleaning rooms, expenses for the provision of extra artificial light, and in many other ways." Card C, "Market socialism". Summary in our words, not a quotation: In the 1930s Oskar Lange proposed that a central planning board set prices, raising a price where goods ran short and cutting it where they piled up, while managers produced where price equaled cost. Card D, "Water in Varra (made up)". Varra's water board sets one water price for the year. In July a drought cuts the reservoir's inflow 30 percent. At the fixed price, use stays the same and the reservoir nears empty, so the board bans lawn watering and pays inspectors to enforce the ban.

12. 8.

    Tala writes one claim about card D using cards A and B. Which claim do the cards support best?

    • Varra shows that a water board is a worse system than a market in the cases it could face
    • Varra's fixed price hid the drought from users, so the board had to replace it with a costly ban
    • Varra shows a market would have ended the shortage, since prices clear a market at once
    • Card B supports Varra's fixed price, since water, like smoke, is a loss that no price can carry
13. 9.

    A student argues from card A that a state should never act in any market. Ren looks for the strongest objection the cards allow. Which is it?

    • Hayek wrote in 1945, before modern computers could gather the knowledge a planner needs
    • Markets reward those who already have more, so a fair society should plan instead of using prices
    • Card D's ban saved Varra's water, which shows that boards allocate water better than prices
    • Card B: the smoke's loss is uncharged, so no price signals it for anyone to act on
14. 10.

    Zee wants to test whether Varra's ban or a higher price would cut water use at lower cost. Which missing evidence would matter most?

    • Whether other towns' water boards also fix their water prices for a whole year at a time, as Varra does
    • How much water lawns use in July, since the ban cuts that one use and leaves the others
    • How much rain Varra usually gets in July, compared with the rain in this year's drought
    • What each use of water is worth to households, and what the inspectors cost to enforce the ban