Planned and market economies

Question 1

Define command/planned economy and give an example

Answer 1

a type of economic system where the resources are state owned and their allocation and use is determined by the centralized decisions of a planning authority e.g. North Korea

Question 2

Pros of planned economy

Answer 2

easier to coordinate resources in times of crisis, inequality in society is reduced, abuse of monopoly power prevented

Question 3

Cons of planned economy

Answer 3

may not meet consumer preferences, limits democracy and personal freedom, corruption

Question 4

Define market economies

Answer 4

an economy based on competition, the private ownership of factors, little government intervention and where the price mechanism determines the allocation of scarce resources through the market forces of supply and demand

Question 5

Pros of a market economy

Answer 5

firms efficient as provide goods and services demanded by consumers and lower average costs and make better use of scarce resources increasing overall output of economy, restrictions from government intervention is avoided

Question 6

Cons of a market economy

Answer 6

ignores inequality, benefits wealthiest, monopolies, over consumed demerit goods (tobacco) underprovided merit goods (education).

Question 7

One reason for the existence of mixed economies is that

Answer 7

the free market economy may lead to market failure

Question 8

How do governments intervene in mixed economies to reduce the disadvantanges of both planned and market economies

Answer 8

Maintaining competition as well as legal and social framework (healthcare, education)

Provided public goods which would otherwise be under provided (street lights)

Redistributing income (benefits, progressive taxes)

Stabilizing the economy

Correcting externalities