1.1.6 Types of economies

Question 1

Free market economies

Answer 1

-Economic decisions made by firms and private individuals
-Supply and demand
-Adam smith - advocated for the invisible hand of the market to allocate resources efficiently
–Friedrich Hayek criticised central planning and believed in free markets

Advantages:
-Efficiency- incentive for firms to innovate
-Wide range of consumer choice
-Rapid growth and living standards

Disadvantages:
-Inequality- large income and wealth disparities
-Lack of public goods which are essential - externalities - healthcare
-Prone to economic cycles - inconsistent - 2008 financial crisis

Question 2

Command economy

Answer 2

-Government makes all economic decisions
-Karl marx - envisioned a classless society with centralised planning

Advantages:
-Equality
-Stability during crises
-Prioritising social goals of welfare- resources for public services

Disadvantages:
-Lack of incentives
-Misallocation - shortages/surpluses
-Complex bureaucracies

Question 3

Mixed economy

Answer 3

-Both private sector and government play significant roles in decision making
-Elements of command and free markets
-Most modern economies

Question 4

Role of the state in a mixed economy

Answer 4

Regulation
-Consumer protection
-Environmental standards
-Financial markets
-EPA set standards for pollution control

Public goods and services
-Provide g+s that are not adequately supplied by private sector - infrastructure, education, healthcare

Welfare and Redistribution
-Implement social safety nets, income redistribution policies to adress poverty and inequality
-Progressive taxation/ welfare programs

Stabilisation and economic planning
-fiscal and monetary policy to manage economic cycle and prevent crises
-Central banks