• Free market—refers to resources and industries owned completely by private ind
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• Free market—refers to resources and industries owned completely by private individuals. This economy type is driven by the goal of profit determined by consumer demand. In a free market, the government maintains a distant role, only ensuring the market remains stable. The market system has many benefits, but also some drawbacks. These include possible shortages and surpluses due to market fluctuations, income discrepancies that can lead to a society of very rich and very poor, and distribution of public services.
• Command market—works through central planning by a government that owns all the resources. Authorities own all resources and establish all facets of the economy, including what and how much is produced, financial compensation to workers, prices of products and who can receive them. The benefits of a true command market system include a similar quality of life – though it tends to be the lowest, not the highest, standard – for all citizens, with little homelessness and no inflation due to government price controls. The command system has a number of drawbacks including limited product selection, needs determined by the government that are truly compatible with what the society requires or wants and the restriction of personal freedoms. When workers do not own the resources, and receive the same amount of compensation regardless of what they do, there is no incentive to improve existing products or make innovations.
• Mixed market—most countries in the world employ a mix of free-market and command-market systems. In an ideal mixed market, both the businesses and the government work together to meet the demand for products in the safest and most efficient manner possible. Mixed market systems are favored by a wide range of societies because they can balance diverse economic and political ideals between groups with vastly different views.
Discussion Question: After reviewing the characteristics of the types of economic systems in the notes provided, discuss the advantages and disadvantages existing under each of the types of economic systems from the perspectives of both a business owner and a consumer.
Explanation / Answer
Answer
Advantages and Disadvantages of free economy
Advantages:
Disadvantages:
Advantages and Disadvantages of command economy
Advantages
1. Industrial power is boosted.
To realize massive projects and attain imperative social goals, command economy would try to boost industrial power.
2. Monopolizing is not allowed.
The main reason for this is that all the forces in a command economy are regulated by the government. There will be no provider that is given control to set the market and rule apart from the government. While monopolizing certainly exists in other types of economy, it is not present in a command economy.
3. Production rates and availability of completed goods are adjusted.
In a command economy, production rates can be adjusted to meet the exact demands of the population. Though it limits choices as compared with other economies, it is still effective in lessening the chances for a shortage to occur.
4. The society and government are streamlined.
This type of economic system has the capability to transform the society to be streamlined with the nation’s vision. This means there is harmony between these two units.
5. The better mobilization of resources.
Because command economy has a unique make-up, production is done as effectively and efficiently as possible. Therefore, all resources will be mobilized on a huge scale, which makes sure progress is quickly achieved.
6. Easy response to internal disasters and emergencies.
The central and command authority in this type of economic system can easily boost production in many of its facilities that are not impacted by a calamity or disaster. This is essential to maintain continuous flow of goods on the market. Apart from this, there will be a rise in production of certain products, which is a great help to communities in overcoming disasters.
7. Social welfare as priority.
Social welfare is a major concern in a command economy, where one of its overriding objectives is ensuring that maximum social welfare will take place. This system breeds a sense of community because of the lack of income inequality, so the society as a whole can take on production and can benefit from it.
Disadvantages
1. Societal needs ignored.
In a command economy, the needs of the society are often ignored for its betterment. For workers, they will not be given a choice on where they can move or where they can work.
2. Freedom is restricted.
This type of economy normally tied to communism, which means that it also puts full control in the hands of the government alone and takes away the freedom of the people. Citizens cannot choose their career paths based on their interests and skills and interests, but rather based on what the authority forces them to do. All work is aligned with needs at a time, and the public do not have the full freedom of choice. Due to this downside of a command economy, people would mostly become discontented.
3. Innovation might be hindered.
While a free market do encourage innovation and change, a command economy does otherwise. Since the government in power is controlling the market, innovation is not a priority or not encouraged at all. This is due to the fact that this economic system controls all aspects of production and does not allow people to make it better. This would lead to a workforce that is not that motivated to create higher-quality services or products.
4. No competition
Market competition is a primary force of improvement, but it is not found in a command economy. After all, the government is the one owning all the industries. Plus, it does not encourage competition, and actually, it even tries to eliminate it. You would not certainly see the benefits of competition in countries implementing this economic system.
5. Black markets would explode.
Because the government put restrictions on many products and services, such offerings may not be available. Consequently, they will be offered on the black market.
6. There might emerge some export problems.
Because it is difficult for the government in control to determine which products and prices will perform well on the international market, exportation can become problematic.
7. Unbalanced amounts of goods would be experienced.
It is difficult for the government to obtain updated information about consumer needs, so rationing is a way of life in most cases. After all, some items are mass produced, while others are simply not enough to support economic needs.
8. The authority might misplace incentives.
Take note that the central government monitors and regulates the supply and prices, rather than planners and other market forces, and decides on the products and services that are going to be produced and distributed. This would result to rewards not reaching to the individuals that deserve them.
9. Lack of Coordination
Because there are no planners who coordinate economic decisions on production, consumption and trade for the entire country, efficient coordination is deemed impossible. Demand and supply can even be mismatched, and products can even fall on a shortage. Other issues are imbalance among food, transportation facilities and electronic devices.
Advantages and Disadvantages of mixed economy
Advantages
1. Equal Distribution of Control
Unlike command economies that put the government primarily in charge, a mixed economy gives the government less regulation and control. This provides the private market with freedom to thrive, operate, expand and grow. Because most of the business is left in the hands of private entities, a great deal of service will be taken care of by groups other than the government. On the other hand, services that will not benefit those in the private sector, such as utilities, libraries, hospitals, roads and social security, are left to be handled by the government.
2. More Efficiency for Private Firms
As stated above, most of the business is left to the private firms, so these organizations are more likely to be efficient compared to groups that are controlled by the government, as they have profit incentive for being innovative and for cutting costs.
3. Freedom for Private Enterprise to Thrive on Their Own
In most cases, private companies can perform public service jobs more efficiently than the government itself. In addition, businesses can allow people to enjoy financial rewards for hard work. In a mixed economy, commercial organizations are given the freedom to manage their own business, hire and fire when necessary and even change the purpose of the business.
4. A Defined Role for the Government
With business left to private enterprises, the government can focus on the regulation of the market to improve economic stability and the country as a whole. When correctly implemented, the government’s policy decisions may seem counter intuitive to the interests of businesses at first, but will actually provide greater stability in the long run. Plus, a mixed economy allows for a social safety net that provides safety for the people who are hit hard by difficult economic times.
5. Safe Haven from Poverty
A mixed economy can help create improved equality and can offer safety net that will prevent the people in a certain country from suffering absolute poverty. It even allows people to enjoy financial rewards of hard work and entrepreneurship.
6. Greater Chance for the Government to Implement Good Policies
This type of economic system is known for allowing government regulations in areas where market failure is experienced. This means that a region will have more space to develop and grow to attain economic success.
7. More Job Investments
For private companies to improve profits, they often will not try to increase income, but decrease expenditure instead by cutting down on employment. These days, this comes not only in the form of job cuts, but outsourcing as well. The cheap labor available throughout all corners of the globe has inspired companies to cut on jobs domestically and hire labor elsewhere to save more money.
Disadvantages
1. Challenge of Finding a Balance
One of the biggest issues that come with a mixed economy is finding a balance between wealth equality and market freedom. This is seen by a number of socialist and progressive thinkers. This problem can lead to lack of social mobility and wide-scale poverty.
2. Government role
While sometimes the government does not go far enough, it can also go too far. Identifying the government’s exact role in private enterprises is sometimes a guessing game that results to unfair practices exhibited on both sides. According to Libertarians, the government tends to manage an economy poorly, and as such, any of its involvements is considered wrong.
3. Excessive Intervention by the Government
Free market economists also criticize a mixed economy, as it allows excessive intervention of the government. Most governments are invariably influenced by short-term political factors.
4. Limited Corporate Size
In a mixed economy, the government might limit company sizes because of rules regarding anti-trust laws and monopolies. Here, companies may even be harshly taxed to support other economic aspects. Without particular security measures in place, entrepreneurial spirit may be destroyed.
5. Higher Taxes
More state intervention in the economy, of course, requires greater investment from the government, which largely comes from tax revenues. An argument against such intervention is that the more it is, the more the need for people to be taxed. This will lead to negative consequences, such as decreased motivation in work, as employees see a large proportion of their earnings going to the taxation agency.
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