I nstitutions play a number of roles in a market economy. Property rights help insure that people bear the costs and reap the benefits of their decisions. Property rights and contract enforcement encourage investment by assuring investors that they will reap the rewards of deferring consumption and assuming risk if these investments perform well. Limiting individual liability and allowing people to pool their investment resources through joint stock corporations also increases investment and future income. Other institutions lower the costs buyers and sellers incur in their efforts to find each other in different kinds of markets.
Many institutions work to promote the goals of certain interest groups.
Labor union, for example, increase the negotiating power of workers in their dealings with employers. Understanding economic institutions and the purposes they serve will help students use institutions more effectively and help them evaluate proposed new institutions or changes in the existing legal and institutional environment. Banks are institutions where people save money and earn interest, and where other people borrow money and pay interest. Explain the relationship between saving money and earning interest and borrowing money and paying interest, after participating in an activity in which they role play savers and borrowers. Saving is the part of income not spent on taxes or consumption.