Question

For 50 years, Cuba has had a centrally planned economy in which the government makes the big decisions on how resources will be allocated. a. Why would you expect Cuba's production possibilitics (per person) to be smaller than those of the United States? b. What are the social institutions that Cuba might lack that help the United States to achicve allocative efficiency?

Short answer

Cuba's centrally planned economy is less efficient than the U.S. market economy. The U.S. has social institutions that promote efficiency, which Cuba lacks, leading to higher productivity in the U.S.

Step-by-step solution

- Understanding Production Possibilities

Cuba has a centrally planned economy, meaning the government makes decisions on resource allocation. This often results in less efficient production compared to a market economy where resources are allocated based on supply and demand. The United States, with its market economy, can efficiently allocate resources, leading to higher production possibilities per person.

- Identifying Economic Efficiency

Economic efficiency in the United States is driven by factors like competition, innovation, and consumer choice. These forces help to ensure that resources are used where they are most valued, leading to higher productivity and better goods and services.

- Discussing Social Institutions in the United States

Social institutions that contribute to the United States' allocative efficiency include a well-developed legal system protecting property rights, a competitive market, financial institutions, and educational systems. These institutions encourage investment, innovation, and skilled labor, which enhance productivity.

- Comparing Social Institutions in Cuba and the USA

Cuba lacks many of these institutions or has them in a less developed form. For example, property rights in Cuba are not as strongly protected, leading to less investment. Markets are not as competitive, stifling innovation and efficiency. These differences contribute to lower production possibilities in Cuba compared to the United States.

Key concepts

Centrally Planned Economy

A centrally planned economy, like the one in Cuba, involves the government making key decisions about how resources are allocated. The government decides what goods and services to produce, how to produce them, and who receives them. This type of economy aims for equal distribution but often sacrifices efficiency.

Despite its goals, there are several downsides:

• Lack of competition: Industries often do not have competitors, reducing the incentive to innovate and improve products or services.
• Misallocation: Government-led allocation can be less responsive to the actual needs and wants of the population, leading to waste and inefficiencies.
• Bureaucracy: Decisions are subject to layers of government bureaucracy, which can slow down processes and lead to delays and inefficiencies.

Consequently, production possibilities per person in centrally planned economies are typically lower compared to market economies.

Market Economy

In a market economy, like that of the United States, resource allocation is driven by the forces of supply and demand. This system promotes a high degree of economic efficiency for several reasons:

• Competition: Firms compete to offer the best products and services, driving innovation and quality improvements.
• Consumer Choice: Consumers decide what to purchase based on their preferences, which signals to firms what to produce.
• Investment: Market economies usually have strong financial systems that facilitate investments in new ideas and technologies, boosting productivity.

These elements contribute to higher production possibilities per person. As a result, market economies often achieve higher levels of prosperity and innovation compared to centrally planned counterparts.

Allocative Efficiency

Allocative efficiency refers to an optimal distribution of resources where they are most valued and can produce the most benefit. In practice, this means resources should be used to produce the goods and services that consumers want the most. The United States, with its market-driven mechanisms, often achieves allocative efficiency better than centrally planned economies.

• Consumer Sovereignty: In a market economy, producers respond directly to consumer demands.
• Resource Mobility: Resources can freely move to their most productive uses in response to market signals.
• Price Signals: Prices in a market economy adjust based on supply and demand, providing essential information for making production decisions.

By contrast, centrally planned economies may fall short in allocative efficiency due to rigid resource allocation by the state, which may not reflect true consumer preferences.

Property Rights

Property rights are the legal ownership rights over resources such as land, buildings, goods, and intellectual property. In the United States, strong property rights are a cornerstone of economic efficiency and innovation.

• Investment and Risk-Taking: Individuals are more likely to invest in new projects if they know that their property is protected by law.
• Maintenance and Improvement: Property owners have incentives to maintain and improve their assets, leading to better quality and utility.
• Market Transactions: Secure property rights facilitate trade and exchange, as parties can trust the legitimacy of ownership claims.

Compared to Cuba, where property rights are weaker or state-controlled, this leads to more significant investment and economic growth in the United States.

Economic Efficiency

Economic efficiency involves maximizing the output from available resources. It includes both productive efficiency (using resources in the least wasteful way) and allocative efficiency (distributing resources where they are most valued).

In market economies, economic efficiency is driven by competition and innovation:

• Productive Efficiency: Competing firms strive to minimize costs and maximize outputs.
• Allocative Efficiency: Resources are allocated toward producing goods and services that meet consumer demands.
• Innovation: Firms continuously seek better methods and technologies to produce at lower costs and higher quality.

In centrally planned economies like Cuba's, the lack of competition and market signals often reduces economic efficiency, leading to lower overall productivity and economic stagnation.