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Lecture 4. Market activities in the STE’s

Lecture 4. Market activities in the STE’s. Lecture outline. Uneasy coexistence between central planning and markets Shortages in consumer markets Informal (“second”) economy: definition and activities Why was the second economy so large? Second economy’s impact.

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Lecture 4. Market activities in the STE’s

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  1. Lecture 4. Market activities in the STE’s

  2. Lecture outline • Uneasy coexistence between central planning and markets • Shortages in consumer markets • Informal (“second”) economy: definition and activities • Why was the second economy so large? • Second economy’s impact

  3. Coexistence between central planning and markets • Markets in the Soviet-type economies • Advantages of markets within an STE: - better response to “non-emergencies” - less planning needs to be done; - potential risks shifted to market sector - possibility to improve incentives; - higher morale of market participants

  4. Coexistence between central planning and markets • Disadvantages of markets in an STE: - ideological difficulties; - unpredictability of input flows from market managed sector of the economy to the planned part of the economy -Main problem: prices in the market depend on prices from planned part of the economy, causing incorrect price signals in the market • In which sectors markets have greater advantages than disadvantages in STE? • Consumer markets as a buffer for planning mistakes  imbalances & shortages

  5. Second economy • Definition: Activities that are (1) knowingly illegal; and/or (2) directly for private gain • Types of activities (besides common crimes): - theft of state property; - corruption; - speculation; - illegal production & sale

  6. Reason for second economy • Price controls • Prohibition of activities & high taxes • Discretionary power of officials and their low official incomes • Poorly protected public property • Tolerant social attitudes

  7. Size and dynamics • How to measure second economy? - surveys - statistical discrepancies - cash use • Dynamics of second economies in STE’s

  8. Impact of second economy • Positive effects: - corrects planners mistakes - greater efficiency in some aspects • Negative effects: • weakens feedback about problems • hinders understanding of the economy • undermines official institutions • inefficiencies due to secrecy, etc.

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