IndexTypes of economic systemPrice theoryUnderstanding supply and demand and the relationship to price theoryTransaction costConcepts of externalitiesLearnings and reflectionThis article is about the importance of the functioning of the economic system than it could also be defined as Institutional Structure of Production. The various concepts such as free market theory, the gross theorem, transaction costs and its foundations, externalities related to production and negotiations. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Types of Economic System There are four types of economic systems; traditional, command, market and mixed economies. A traditional economic system focuses exclusively on goods and services directly related to its beliefs and traditions. A command economic system is characterized by dominant centralized power. A market economic system is based on the free market and does not allow any kind of government involvement. Finally, a mixed economic system is any type of combination between a market economic system and a command economic system. [1].Price theoryPrice theory is an economic theory according to which the price of any specific good or service is based on the relationship between supply and demand. Pricing theory assumes that the point at which the benefit obtained by those demanding the entity meets the seller's marginal costs is the most optimal market price for the good or service. Understanding Supply and Demand and How It Relates to Price Theory Supply denotes the quantity of products or services the market can provide. This includes tangible assets, such as cars, or intangible assets, such as the ability to schedule an appointment with a qualified service provider. In any case, the available offer is limited in nature. At any given time there are only a certain number of cars available and only a certain number of appointments available. The question applies to the market's desire for the object, whether tangible or intangible. Furthermore, at any given time, only a finite number of potential consumers are available. Demand can vary based on a number of factors, such as whether an improved version of a product is available or whether a service is no longer needed. Demand can also be influenced by an item's perceived value, or affordability, by the consumer market. To achieve equilibrium, the goal is to find a price that allows the number of available items, called supply, to be reasonably covered by potential customers. If the price is too high, customers may avoid the good or service, resulting in oversupply. Conversely, if the price is too low, demand may significantly exceed available supply. Economists use price theory to find the selling price that brings supply and demand as close to equilibrium as possible. Transaction Cost Transaction costs are expenses incurred when buying or selling a good or service. Transaction costs represent the labor required to bring a good or service to market, giving rise to entire industries dedicated to facilitating trade. In a financial sense, transaction costs include broker commissions and spreads, which are the differences between the price paid by the dealer for a security and the price paid by the buyer. Concepts of Externalities Voluntary exchange will only take place if both parties perceive that they are better off, this sometimes causes externalities. Now, what is externality? Externalities are costs or benefits, nottransmitted through prices to other parties other than those involved in the transaction: when they are advantageous they are positive externalities and the rest, if they are not advantageous or expensive, are negative externalities. Let's talk about negative externalities in the first place. Let's assume a practical situation. Imagine a corn farmer and consider the things he needs to support the growth of corns, they could be things like fertilizers, water, sunlight, etc. Suppose a river flows alongside its crop and some of its fertilizers are drowned and leaked into the water body, often this results in the large killing of fish which in turn impacts the fisherman, recreational and landowners and suffer the externalities negative since for the fisherman the fish are the source of income and as they are killed it will have a negative impact on his economic condition, not only him, the final consumer will also have to face the effect of negative externalities. These externalities can be broadly classified into three categories Taxation: We can impose tax on production, which will reduce the quantity of goods produced which will automatically reduce the negative externalities. However, the difficulty lies in monitoring how much production is being done, and if high production is not being done, then why is the supply constant and are people buying at high prices. Regulations Technology-Specific Methods: This is where the government requires manufacturers to use the certain technologies to reduce pollution or emissions. The advantage is that monitoring costs are quite low. You don't need to have someone out there to monitor the amount of emissions until the technology works and is there. The introduction of newer technology has somewhat reduced negative externalities. For example, the use of electronic precipitators instead of manual collectors or hoppers has enormously reduced the level of pollution and ash content in the atmosphere, but again the underlying problem is that it reduces the possibilities for innovative methods that the company can use to further reduce the pollution content because there would be no immediate need. Limit the amount of goods or pollution produced: The advantage of this is of course that companies now have reason to find innovative ways to reduce pollution, but the disadvantage is that the costs of monitoring are quite high. Therefore, the best way to counteract negative externalities is the property rights solution. Property right solution: If property is globally defined, divisible, and defensible, and denial or transaction costs are low, simply by assigning property rights we can overcome externalities. The three characteristics you need to have fully functioning property rights solutions. Then comes the well-defined concept of 3D: what is the object to which the owner has rights. How the owner exercises his rights. Divisible: Are these rights separable? And whether they can be traded or not. Defensible: Are these rights enforceable? Are these rights recognized by custom, the community, or a government agent? We assign ownership rights in the example above. Suppose the farmer does not change his behavior and continues to lose fertilizers into the river but this time the fisherman can trade with the farmer to reduce the amount of fertilizers he spreads on the field. This would reduce the amount of fish dying downstream. We could also, conversely, define the fisherman's property rights, which we might initially think of as preventing the farmer from using fertilizer on the land, but now the farmer has the knowledge to.