Lesson 6: Estonia

Introduction

In this lesson, students learn how Estonia is a testament to the productive and ennobling power of freedom. After waves of successive invasions from East and West, the small and fledgling country on the Baltic Sea was dragooned into the Soviet Union in 1940. There its people, about 1 million in total, were trapped for five decades as unwilling subjects of the socialist experiment. The experiment proved a failure. Eventually, Estonia’s workers and intellectuals decided they had nothing to lose but their chains. So, they joined hands in revolt. In its place, the Estonians created one of the freest nations on Earth.

Key Terms

Control Problem
The difficulty central planners have in controlling human wants and desires.

Incentive Problem
The problem that occurs with central planning when individuals and central planners are not incentivized to serve the general interest.

Inflation
A general increase in the price level.

Knowledge Problem
The idea that the information for economic planning is distributed across individual members of society and cannot be known by central planners.

Market Economy
An economy that relies on a system of interdependent market prices to allocate goods, services and productive resources and to coordinate the diverse plans of consumers and producers, all of them acting according their self-interest.

Pathologies of Privilege
The problem that occurs in central planning when bureaucrats gain power, and some are privileged over others. 

Price System
A decentralized system in which the forces of supply and demand determine the prices of goods and services.

Property Rights
Legal protection for the ownership of tangible or intangible resources.  Property rights give the holder the ability to do with that property what they choose, including holding on to it, selling it or transferring it to someone else.

Shortage
When the quantity demanded of a good or service exceeds the quantity supplied at the prevailing price.

Tariff
A tax on an imported good or service.

Totalitarianism
A form of government that attempts to assert total control over its citizens’ lives.

Tragedy of Commons
The overuse, waste or mistreatment of things owned in common.

Objectives

Students will be able to 

• Define shortage.
• Explain the relationship between shortages and black markets.
• Identify the institutions necessary for the Estonian economy to recover after totalitarian socialist rule.

Voluntary National Content Standards in Economics

CONTENT STANDARD 7: Markets and Prices

Students will understand that a market exists when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

• Benchmark 2: A shortage occurs when buyers want to purchase more than producers want to sell at the prevailing price

CONTENT STANDARD 8: Role of Prices

Students will understand that prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.

• Benchmark 4: Government-enforced price ceilings set below the market-clearing price and government-enforced price floors set above the market-clearing price distort price signals and incentives to producers and consumers. Price ceilings can cause persistent shortages, while price floors can cause persistent surpluses.

CONTENT STANDARD 10: Institutions

Students will understand that Institutions evolve and are created to help individuals and groups accomplish their goals. Banks, labor unions, markets, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and enforced property rights, is essential to a market economy. 

• Benchmark 1: Property rights, contract enforcement, standards for weights and measures, and liability rules affect incentives for people to produce and exchange goods and services.

CONTENT STANDARD 17: Government Failure

Students will understand that the costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued. 

• Benchmark 4: Price controls, occupational licensing, and reductions in antitrust enforcement are often advocated by special interest groups. Price controls can reduce the quantity of goods and services produced, thus depriving consumers of some goods and services whose value would exceed their cost.

Time Required

45 minutes