1.1.6 Free market economies, mixed economy and command economy

Distinction between free market, mixed and command economies

In a free market economy, individuals are free to make their own choices and own the factors of production without government interference. In a command economy, the government allocates all of the scarce resources in an economy where they think there is a greater need. Mixed economies has features of both command and free economies. The market is controlled by government and the forces of supply and demand so the gov provides public goods(roads) and merit goods (healthcare)

What does the UK operate under

Operates a mixed economy

Adam Smith and the free market

Adam Smith argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests.

Friedrich Hayek and the free market

Hayek was critical of command economies. He was concerned about the information required to distribute resources effectively and argued it was impossible for the government to process this information effectively.

Karl Marx views on free market

Karl Marx saw the free market as unstable. He argued that free marker economics result in exploitation of workers.

Advantages of a free market economy

Firms are likely to be efficient because they have to provide goods and services demanded by consumers. They are also likely to lower their average costs and make better use of scarce resources. Therefore overall output of the economy increases.

Disadvantages of a free market economy

Free market ignores inequality and tends to benefit those who hold most of the wealth. There could be monopolies which could exploit the market by charging higher prices. Public goods are not provided in a free market such as national defence.

Advantages of a command economy

Might be easier to coordinate resources in time of crises, such as wars. The government can compensate for market failure by reallocating resources.

Disadvantages of a command economy

Governments fail, as do markets, and they may not be fully informed for what to produce. It limits democracy and personal freedom. May not necessarily meet consumer preferences.

Role of state in mixed economy

Creating a framework of rules (prevent abuse of monopolies), supplements and modifies the price system (produce public and merit goods), redistributes income (move income from rich to poor) and stabilises the economy (government will attempt to manage the level of demand in the economy)

Why are things like education provided by the state

Education system is funded by government and tax revenue. APP .Under-provided in a free market as the external benefits are not considered