Free Market Economy, Mixed Economy & Command Economy Flashcards
Free Market Economy
3
Countries that rely to a large extent on the market mechanism
Adam Smith was a strong advocator for free market economies, stating that the market allocates resources efficiently without government interference
Hayek was also a strong advocate for them, and his views were influential in the Thatcher government during the 1980s which saw a huge sell-off of state owned business and a reduced role for the state in providing housing
Free Market Pros & Cons
2 & 3
Pros -
Freedom of choice for consumers forces producers to use resources efficiently to be competitive (Consumer Sovereignty)
Incentives to innovate and improve as competition means firms must find ways to offer low prices and quality goods to earn profits
Cons -
Vast inequalities of income & wealth. Taxes tend to be low, meaning governments can’t always provide enough thing such as state housing, benefits and pensions to those on low incomes. Example is Thatcher’s 1980s government which lead to huge income inequality especially in the north of England. In 1979, 13.4% of the population lived below 60% of median incomes before housing costs. By 1990, it had gone up to 22.2%
Monopolies can form, which can lead to higher prices and poor service
Risk and uncertainty as no guarantee of employment
Command Economies
The state owns and controls most resources and allocates them based ona government plan. Used in communist countries e.g. Soviet Union
Command Economies Pros & Cons
Pros -
Much less inequality as the government gives people very similar wages
Greater stability as employment is always kept at similar levels
Cons -
Little incentive for an educated workforce, will be paid similarly to lowest quality job
Lack of innovation & efficiency as there is no profit incentive
Mixed Economies
There are no pure free market or command economics, all countries use a mixture of both free market components and planned elements.
e.g. In Cuba the state controls a lot of economic activity
