types of economy

types of economy

1. COMMAND ECONOMY

   • advantages
     • greater equality
       • the state can ensure that everyone can enjoy a minimum standard of living and that no one is extremely rich
     • macroeconomic stability
       • the state can ensure that booms and slumps are smoothed out
     • external benefits and external costs
       • may be taken into account when planning production
     • no exploitation
       • there is no exploitation of workers and consumers by privately owned monolpolies
     • full employment
       • the sate can ensure that all workers are employed
   • disadvantages
     • inefficiency
       • the absence of the profit motive and competition may result in an inefficient allocation of resources
     • lack of incentives to take risks
       • again the absence of the profit motive may reduce incentives for investment
     • restrictions on freedom of choice
       • people would be directed into the jobs deemed to be needed by the state
     • shortages and surpluses
       • if the state miscalculates supply and demand then there may be excess demand and/or excess supply of goods and services

2. free market economy

   • disadvantages
     • inequality
       • those who own resources are likely to become richer than those who dont own resources
     • trade cycles
       • free market economies may suffer from instability in the form of booms and slumps
     • imperfect information
       • consumers may be unable to make rational choices if they have inadequate information or if there is asymmetric information
     • monopolies
       • there is a danger that a firm may become the sole supplier of a product and then exploit consumers by charging prices higher than the free market equilibrium
     • externalities
       • these are costs and benefits to third parties which are not taken into account when goods are produced and consumed
   • ADVANTAGES
     • consumer sovreignty
       • this implies that spending decisions by consumers is what gets produced
     • flexibility
       • the free market system can respond quickly to changes in consumer wants
     • no officials
       • are needed to allocate resources
     • competition
       • and the motive of profit help to promote an efficient allocation of resources
     • increased choice
       • for consumers compared with a command economy
     • economic and political freedom
       • for producers and consumers to own resources

3. mixed economy

   • ROLE IN WHICH THE STATE PLAYS
     • defence and internal security
     • provision of public goods
     • provision of essential public services, e.g. education and health
     • redistribution of income from rich to poor