Microeconomics

Seite 1

Allocation of Resources

Types of economic systems

Planned economy - government owns and controls the means of production.

Mixed economy - private individuals owning production means, but with government intervention in some sectors.

Free market - entire means of production owned and controlled by private individuals.

Advantages of a planned economy:

Reduction in inequality.

Externalities taken into account.

Prevention of natural monopolies occuring.

Higher employment rates.

Disadvantages of a planned economy:

Little incentive to be efficient.

High admin costs, corruption and bureaucracy are more prominent.

Poor information could lead to shortages/surpluses.

Lack of choice/diversification.

Advantages of a free market:

Increased efficiency due to profit incentives.

More consumer choice.

Disadvantages of a free market:

Monopoly power can lead to exploitation and inequalities.

Public goods such as street lights will not be provided.

Merit goods such as education will be underprovided.

Over-consumption of goods with negative externalities.