1.1.6 - free market economies, mixed economy and command economy Flashcards
What is a free market economy?
A free market economy means that economic decisions and resource allocation are solved by price mechanism
Who owns factors of production in a free market economy?
Private ownership of resources means consumers and producers are free to make their own choices to maximise their own utility, all without government interference.
What did Adam Smith advocate in terms of the free market?
Adam Smith advocated for the ‘invisible hand’ of the market which allocated resources efficiently.
What did Friedrich Hayek believe about government intervention in the free market?
Friedrich Hayek believed that the state shouldn’t interfere in the free market and that its role should be to maintain the rule of law.
What was Friedrich Hayek’s view on poverty in free market economies?
He advocated that the poor in free market countries were better off than those in command economies because at least they had personal freedom.
What are the advantages of a free market economy?
- Productive efficiency due to competitive market
- Consumer sovereignty as wide range of choices in products and services
- Rewards entrepreneurship and encourages innovation
- Economic growth
- Automatic system due to the ‘invisible hand’.
What are the disadvantages of a free market economy?
- Inequalities in wealth
- Lack of public and merit goods and provision of demerit goods
- Little control of negative externalities/maximisation of positive externalities
- Information gaps
- Limited regulation of resources which could be wasted on unproductive expenses
- If competition disappears, monopolies can arise – charge high prices and offer low quality of service.
- Economic instability
What is a command economy?
A command economy means that the government or central authority makes all economic decisions in order to achieve output targets and an equal distribution of resources.
Who owns factors of production in a command economy?
Public ownership of resources and there is no private property, as everyone is assumed to be selfless by working for a common good..
What did Karl Marx believe about capitalism?
Karl Marx believed that labour is exploited by capitalists, the owners of the means of production.
Why did Karl Marx advocate for socialism?
He argued that labour was underpaid by business owners, enabling them to make profits, so a socialist government was needed to prevent inequality and exploitation.
What are the advantages of a command economy?
- Equality in wealth (minimum standard of living, no unemployment)
- Provision of public and merit goods and no demerit goods
- Control of negative externalities through strict regulation
- Economic instability
- Long term planning means industry doesn’t have to keep changing and shifting resources.
What are the disadvantages of a command economy?
- Lack of profit motive and rewards for entrepreneurship which discourages innovation and lessen economic growth – no competitive pressure on price or quality
- Resource misallocation which can lead to shortages or surpluses
- Lack consumer sovereignty (goods and services desired by citizens not necessarily produced)
- Lose their freedom over making choices
- Shadow market activity can flourish
- Decision making will be slow as has to go through various stages and there could be an increase in bribery and corruption.
- Lack of incentive to take risks
What is a mixed economy?
A mixed economy involves both the free market and the government which play significant roles in economic decisions and resource allocation.
What are the roles of government in a mixed economy?
- Regulation – the state regulates various aspects of the economy, such as consumer protection, environmental standards, and financial markets
- Prevent the abuse of monopolies and protect customers
- Public goods and services – the government provides public goods and services that may not be adequately supplied by the private sector, including infrastructure, education, and healthcare
- Welfare and redistribution – governments implements social safety nets, income redistribution policies, and tax regimes to address poverty and inequality
- Stabilisation and economic planning – governments may use fiscal and monetary policies to manage economic cycles and prevent economic crises through controlling the level of demand.
What did Keynes believe about free markets?
Keynes questioned the idea that the free market would automatically correct itself to achieve maximum welfare. Thus, the government has a role to control markets to ensure maximum welfare as the market won’t activate this by itself.
