Free Market, Mixed and Command Economies

Free Market, Mixed and Command Economies

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Free Market, Mixed and Command Economies

  • Economies of countries can be structured and run in different ways. Some have more government intervention then others.
  • Most of the world’s economies tend to have a mixture of some free market and some government intervention.
  • For example the U.K government intervenes when it comes to providing health and education as it might be under provided by the private sector in a free market.

A free market economy

  • This is when the economy is functioning through the price mechanism of supply and demand. There is no government intervention.
  • There are no complete free market economies left in the world today. Japan is the closest country to having minimal government intervention. Most of the words developing countries tend to have less government intervention such as Malaysia.

Advantages of a free market economy

  1. Quality Improves – Competition means firms have to constantly improve their products and services to gain a competitive advantage in a market.
  2. More Choice – A greater incentive to start business will mean more choices for consumers.
  3. Motivation to increase incomes – Free markets provide enterprise with an incentive to earn more profits as entrepreneurs get to keep their rewards.
  4. Productive efficiency – Businesses try to lower their costs of production in order to keep prices low and compete. 

Disadvantages of a free market economy

  1. Increase in poverty – A percentage of the population may be unable to work or structurally unemployed (Lack Skills). They could find themselves in poverty without any government intervention.
  2. Absence of merit goods – There is not enough profit or incentive in the free market to produce and provide public/merit goods.  
  3. Externalities are ignored – Firms are more interested in making profits and do not take into account negative externalities from production such as pollution.
  4. Income inequality – A lack of government intervention to redistribute income through taxes and benefits can lead to income inequality.

A mixed economy

  • This is an economy where some resources are allocated by the free market (Supply & Demand) and some by the government.
  • Most of the world’s economies are mixed such as U.S.A, U.K, China, France, Sweden etc.
  • The degree of government intervention varies from country to country. In general European governments tend to have more intervention then North American governments.

Command/ Controlled Economies

There is only one major planned economy in the world (North Korea).

Advantages of a command economy

  1. Prevent monopoly power – The government is able to protect consumers from the abuse of monopoly power through the Competition Commission (CC) and the Office of Fair Trading (OFT)
  2. Control negative externalities – The government is able to put limits on pollution and put high taxes on harmful products such as alcohol. They are also able to ban products and substances such as drugs.
  3. Maximise welfare – A command economy allows the government to ensure social welfare is maximised rather then profit maximisation.
  4. Funding of public goods – The government can fund public goods such as street lighting, defence and the police force. These public goods might otherwise be under provided.

Disadvantage of a command economy

  1. No price competition – A lack of competition means consumers are not able to benefit from lower prices.
  2. Lack of efficiency – A lack of competition means businesses have no incentive to be productively efficient.
Tushar Depala

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