1.1.6 Free market economies, mixed economy and comman economy

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6 Terms

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The distinction between free market, mixed & command economies

  • Command economy: all resources allocated by government ; Karl Marx

  • Mixed economy: some resources allocated by price mechanism, some by government ; Adam Smith

  • Free-market economy: All resources allocated by price mechanism ; Friedrich Hayek, Adam Smith

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Advantages of command economy

  • reduce inequality

  • Government can direct firms to cooperate - more output - more profit

  • Government can fund provision of public goods - high external benefits

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Disadvantages of command economy

  • lack of competition between firms

    • No financial / incentive

    • No profit motive

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Advantages of free market economy

  • competition

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Disadvantages of free market economy

  • inequality of income & wealth distribution

  • Erratic swings in business cycle (no government intervention) - unemployment

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Role of the state in a mixed economy

= government intervention

  • redistribute income

  • Provide essential g&s