Is There an Alternative to the Market Economy? Flashcards
What are three typos of economic systems?
It is helpful to distinguish three pure types of economies, called traditional, command, and free-market economies. These economies differ in the way in which economic decisions are coordinated. But no actual economy fits neatly into one of these three categories—all real economies contain some elements of each type.
What is a traditional economy?
traditional economy
An economy in which behaviour is based mostly on tradition.
Traditional systems were common in earlier times. The feudal system, under which most people in medieval Europe lived, was a largely traditional society. Peasants, artisans, and most others living in villages inherited their positions in that society. They also usually inherited their specific jobs, which they handled in traditional ways.
What is a command economy?
command economy
An economy in which most economic decisions are made by a central planning authority.
In command economies, economic behaviour is determined by some central authority, usually the government, or perhaps a dictator, which makes most of the necessary decisions on what to produce, how to produce it, and who gets to consume which products and in what quantities. Such economies are characterized by the centralization of decision making. Because centralized decision makers usually create elaborate and complex plans for the behaviour that they want to impose, the terms command economy and centrally planned economy are usually used synonymously.
What is a free-market economy?
free-market economy
An economy in which most economic decisions are made by private households and firms.
In the third type of economic system, the decisions about resource allocation are made without any central direction. Instead, they result from innumerable independent decisions made by individual producers and consumers. Such a system is known as a free-market economy or, more simply, a market economy. In such an economy, decisions relating to the basic economic issues are decentralized. Despite the absence of a central plan, these many decentralized decisions are nonetheless coordinated. The main coordinating device is the set of market-determined prices—which is why free-market systems are often called price systems.
What is a mixed economy?
Mixed Economy
An economy in which some economic decisions are made by firms and households and some by the government.
In practice, every economy is a mixed economy in the sense that it combines significant elements of all three systems in determining economic behavior.
What is governments role in a market economy?
Key institutions are private property and freedom of contract, both of which must be maintained by active government policies. The government creates laws of ownership and contract and then provides the institutions, such as police and courts, to enforce these laws.
What is a market failure?
In modern mixed economies, governments go well beyond these important basic functions. They intervene in market transactions to correct what economists call market failures. These are well-defined situations in which free markets do not work well.
What are public goods?
some products, called public goods, are usually not provided at all by markets because their use cannot usually be restricted to those who pay for them.
What is an externality?
In other cases, private producers or consumers impose costs called externalities on those who have no say in the transaction. This is the case when factories pollute the air and rivers. The public is harmed but plays no part in the transaction.
