Free market vs command economy
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34 Terms
Free market
Capitalism
Command
Socialism
Free market
Private sector owns all resources in the economy and allocates goods/services through the price mechanism
Command
Resources are owned and allocated by the public sector (government/state)
Free market
Motive of firms = profit maximisation
Command
Motive of firms = social welfare maximisation
Free market
High freedom of choice
Command
Low freedom of choice
Free market
High competition
Command
No competition (less innovation)
Free market
High variety/quality of goods/services (firms attempt to maximise satisfaction of consumer wants/needs due to profit motive, causing innovation)
Command
Low variety/quality of goods/services
Free market
Quick response to changes in demand
Command
Slow response to changes in demand
Free market
Allocative efficiency typically except for market failure in some markets
Command
Low efficiency (no motive to cut costs) but less likely to suffer market failure
Command
Shortages and surpluses in supply are likely
Free market
Price mechanism prevents shortages and surpluses in supply
Free market
Merit goods often underconsumed/underproduced (vice versa de-merit)
Command
Merit goods (and de-merit goods) typically provided at QSO
Free market
May have missing markets for public goods
Command
Full effective allocation of public goods
Free market
Uneven income distribution
Command
Even income distribution
Free market
Monopoly presence
Command
No monopolies
Free market
Price mechanism ensures equilibrium
Free market
Lots of dynamic efficiency due to profit motive for firms
Free market
Freedom, liberty, and choice for consumers - increased living standards
Free market
No risk of government failure (pro)
Free market
Equilibrium may cause inequity (excluding customers from accessing the market at P1)
Free market
Excessive profiteering among firms is possible among firms causing cost cutting in dangerous areas such as product/environmental standards
Free market
Creative destruction is possible causing job insecurity and potential unemployment
Free market
Potential for price volatility, particularly for commodities