POL ECON - ECONOMIC SYSTEMS

A process or mechanism for answering the three fundamental questions in economics.

Economics system

A set of rules, institutions, and processes that govern the production, distribution, and consumption of goods and services in a society. It determines how resources are allocated, how goods and services are produced, and how income and wealth are distributed.

Economic system

What goods and services are produced, how they are produced, and for whom they are produced are all questions answered by government planning.

Command Economy

An economic system in which the material means of production are owned by the whole community. The system aims to form a classless society by principally transferring private properly to state ownership replacing the profit motivated free enterprise system or market by a centrally planned system.

Socialism

The means of production and distribution is owned by the public.

Public Ownership

The system have a central planning authority or board which formulates plan for the entire economy by laying down the various objectives and targets to be achieved during the plan period.

Central Planning

These objectives often revolve around creating a more equitable and just society, where resources are distributed fairly and everyone has access to basic necessities.

Definite Objective

Production in state owned industries is generally by the preferences of consumers and the available commodities are distributed to the consumers at fixed prices without any restriction.

Freedom of Consumption

In times of scarcity or economic crisis, socialist governments may implement rationing systems to ensure that essential goods and services are distributed fairly.

Rationing

Socialist systems often prioritize meeting the basic needs of all citizens before satisfying luxury or discretionary desires.

Priority Needs

The defining goal of socialism

Equality

A key feature of socialist economies where the government or a central planning authority sets prices for goods and services.

Planned Pricing Process

The government assesses the costs of production, including labor, materials, and overhead expenses.

Cost Analysis

The government determines the value it assigns to the good or service, considering its importance to society and its contribution to overall economic goals.

Value Determination

Based on the cost analysis and value determination, the government sets a price for the good or service.

Price Setting

The government often has a high degree of control over the economy and society, which can lead to a concentration of power in government agencies

Centralization of power

Bureaucratic procedures are often formal and standardized, which can make it difficult for individuals to navigate the system.

Formality

Bureaucrats often specialize in specific tasks, which can lead to a lack of flexibility and adaptability.

Specialization

Bureaucracies are typically hierarchical, with clear lines of authority and responsibility.

Hierarchy

Bureaucracies are often characterized by a complex system ofrules and regulations.

Rules and regulations

Bureaucratic procedures can be slow and inefficient, leading to delays and waste.

Inefficiency

Bureaucrats may have opportunities for corruption, as they control the allocation of resources and services.

Corruption

Bureaucrats may be less accountable to the public than elected officials, which can make it difficult to hold them responsible for their actions.

Lack of accountability

Bureaucratic rules and regulations can stifle innovation and entrepreneurship.

Stifling of innovation

Transferring power and decision-making authority to lower levels of government.

Decentralization

Reducing the number of rules and regulations that businesses and individuals must comply with.

Deregulation

Implementing mechanisms to hold bureaucrats accountable for their actions.

Accountability measures

Encouraging citizen participation in decision-making processes.

Citizen participation

Resources are owned by private individuals.

Market Economy

An economic system in which each individual in his capacity as a consumer, producer and resource owner engaged in economic activity with a large measure of economic freedom.

Capitalism

The ownership and management of factors of production is by private individual.

Private Property

The main motive behind capitalism is profit making.

Profit motive

Allowed to operate automatically without any direction and control by the central authority.

Price Mechanism

A blend of market and command economies. In a mixed economy some parts or sectors of the economy are left to private ownership (market) while in other sectors there is substantial government ownership or government-directed production (command).

Mixed Economy

Based on free market wherein most goods and services are allocated by the interaction of supply and demand.

Role of Market Forces

To address market failures to achieve social objectives.

Role of Government Intervention

Set rules for businesses to ensure fair competition, protect environment, and safeguard workers and consumers.

Regulation

___ can be used to discourage production of negative externalities like pollution. ___ can encourage the production of positive externalities like renewable energies.

Taxation and Subsidies

Government provides essential essential services like national defense, public education, and infrastructures funded by taxes.

Public Goods and Services

Unemployment benefits and social security for those who cannot participate in the market, reducing inequality and promote social stability.

Welfare and Redistribution

Fiscal and monetary policy intended to stabilize the economy sometimes conflict with natural cycle of the market.

Policy inconsistency

Private sector’s goal is to maximize profit while public sector’s goal is social welfare, leading to lack of coordination

Conflict of interest