TYPES OF ECONOMY + GOV FAILURE

Question 1

What is a command economy

Answer 1

An economy where all resources are allocated by the government.

Question 2

What are the pros and cons of a command economy

Answer 2

Cons - government failure

Pros - can quickly correct market failure

reduced inequality

Question 3

if the government notices negative externalities from cigarettes and alcohol, it could intervene with:

Answer 3

Indirect taxes, minimum prices and regulation

Question 4

if the government spots positive externalities from education and healthcare, the government can intervene with:

Answer 4

Subsidies and state provision

Question 5

Taxing cigarettes and setting minimum prices on alcohol, for instance, can often lead to:

Answer 5

Unintended consequences, like black markets and smuggling

Question 6

What is meant by a free market economy

Answer 6

An economy where all resources are allocated by the price mechanism. There’s NO government intervention.

Question 7

What is meant by a mixed economy

Answer 7

An economy where some resources are allocated by the price mechanism, and some are allocated by the government.

Question 8

What are the key beliefs of adam smith

Answer 8

Smith described the price mechanism as an “invisible hand”.

He argued that free markets were very efficient and that the government should only intervene in cases of market failure

Question 9

Karl Marx beliefs

Answer 9

Marx argued that free markets would lead to capitalism and inequality.

Question 10

Hayek beliefs

Answer 10

Friedrich Hayek described the price mechanism as a “communication network”.

Changing prices told producers what consumers wanted and what they didn’t want, eliminating excess supply and demand.

Hayek criticised Marx’s ideas for a command economy. Hayek argued that a government would not have enough information to work out how to allocate resources effectively.

Question 11

Why did marx belief that free markets would lead to inequality