17-Economic system

Question 1

Advantage of Free Market Economy
- Economic Efficiency & Lower Prices

Answer 1

• COMPETITION & PROFIT MOTIVE → EFFCIENT ALLOCATION of RESOURCES
• COMPETITION means FIRMS try to keep PRODUCTION COST DOWN to SELL GOODS at COMPETITIVE PRICE

Question 2

Advantage of Free Market Economy
- Quality of Goods

Answer 2

COMPETITION → FIRMS IMPROVE QUALITY of Goods to GAIN ADVANTAGE over RIVALS

Question 3

Advantage of Free Market Economy
- Consumer Sovereignty

Answer 3

SPENDING DECISIONS by CONSUMERS DETERMINES WHAT IS PRODUCED → CONSIDERABLE COSNUMER SOVEREINTY

Question 4

Advantage of Free Market Economy
- Greater Choice

Answer 4

CONSUMER has WIDE SELECTION of GOODS
WOKERS has WIDE CHOICE of EMPLOYMENT OPPORTUNITIES

Question 5

Disadvantage of Free Market Economy
- Externalities

Answer 5

Firms will base their DECISIONS on PRIVATE BENEFITS than SOCIAL COSTS & BENEFITS

Question 6

Disadvantage of Free Market Economy
- Inequality

Answer 6

• Those who OWNS RESOURCES will become richer THAN those who don’t → INCREASE INCOME INEQUALITY
• LACK of WELFARE SUPPORT → People living in ABSOLUTE POVERTY

Question 7

Disadvantage of Free Market Economy
- Imperfect Information

Answer 7

• ASYMMETRIC INFORMTAION → CONSUMERS wont MAKE RATIONAL CHOICES
  → People CONSUMER EXCESS DEMERIT GOODS like Tobacco by Being UNAWARE OF DANGERS
• LACK OF REGULATIONS & TAXATION to PROTECT CONSUMERS

Question 8

Disadvantage of Free Market Economy
- Monopolies

Answer 8

DANGER Exists as A FIRM may become the SOLE SUPPLIER of A GOOD → EXPLOIT CONSUMERS by CHARGING HIGER PRICES THAN FREE MARKET EQUILIBRIUM

Question 9

Disadvantage of Free Market Economy
- Under Provision of Merit & Public Goods

Answer 9

• FREE RIDER PROBLEM → UNDERPROVISION of MERIT GOODS by MARKET MECHANISM
• DEFENSE & STREET LIGHT are PUBLIC GOODS
• HEALTH CARE & EDUCATION are MERIT GOODS

Question 10

Advantage of Command Economy

Answer 10

• GOVERNMENT INTERVENTION in the ALLOCATION OF RESOURCES → DECISIONS bases on NATIONAL INTEREST
• GOVERNMENT AIMS MORE EQUITABLE DISTRIBUTION of INCOME & WEALTH
  STATE Ensures that EVERYONE Enjoys a MINIMUM STANDARD of LIVING & NO ONE BECOMES EXTREMELY RICH
• GOVERNMENT LIMITS EXTERNAL COSTS from PRODUCTION and CONSUMPTION
  Eg- It LIMIT POLLUTION EMISSIONS from FIRMS & PLACE SEVERE TAXES on HARMFUL GOOD like Tobacco & Alcohol
• GOVERNMENT FUND PROVISION of PUBLIC GOODS like DEFENCE, it also INCREASES PRODUCTION of GOODS that YIELD HIGH EXTERNAL BENEFITS like EDUCATION & HEALTHCARE
• STATE ensures ALL WORKERS are EMPLOYED

Question 11

Disadvantages of Command Economy

Answer 11

• PRICE MECHANISM UNABLE TO OPERATE → MARKETS SUFFERS FROM SHORTAGES & SURPLUSES → INEFFICIENT ALLOCATION OF RESOURCES
• LACK OF COMPETITION → INEFFICIENCY & POOR-QUALITY PRODUCTS, especially when the emphasis is on MAXIMIZING OUTPUT rather Than PROFIT
• LESS CHOICES of GOODS for CONSUMERS, LABOR are DIRECTED to SPECIFIC JOBS with NO CHOICE DEPENDING on their LOCATION

–> Lack of Financial Incentive - MANAGERS has NO PROFIT INCENTIVE TO TAKE RISKS by DEVELOPING NEW GOOD, as the FOCUS IS ON OUTPUT
LABOR has less INCENTIVE to WORK HARD, since WAGES are FIXED by GOVT