1.1.6 Free market economies, mixed economy and command economy

what is a free market economy?

• a free market economy is an economy that has no government intervention in the allocation of resources or the distribution of goods/services

• proposed by Adam Smith

what is a command economy?

• a command economy is an economy in which all of the resources are owned by the state and the government controls the distribution of goods/services

• proposed by Karl Marx

what is a mixed economy?

• a mixed economy is a blend of the free market and planned economy as individuals, firms and the government own factors of production and distribute goods/services

• propsed by Friedrich Hayek

what is the role of the state in a mixed economy?

• government intervention occurs mainly through taxation (to raise revenue) and then spending the revenue to redistribute income and provide essential goods/services

• Income is redistributed through the creation of a welfare system, which often includes unemployment benefits, healthcare, and pension provision

what are the advantages of a free market economy?

• profit incentive motivates people to develop entrepreneurial ideas

• greater variety of goods/services

• competition leads to better quality of goods/services

• competition leads to lower prices of goods/services

what are the disadvantages of a free market economy?

• wealth is concentrated in the hands of the few as they are able to keep buying up the scarce factors of production

• this increases inequality so the gap between the rich and the poor continues to grow

• monopolies develop as firms increase market power through mergers and acquisitions

• this leads to exploitation of consumers and supply chains

what are the advantages of a command economy?

• social equality is the goal of the system as opposed to profit maximisation, so there’s less inequality

• all workers receive the same wage irrespective of role or career. This helps create scial equality

• less unemployment

what are the disadvantages of a command economy?

• receiving the same wage creates disincentives for people to acquire difficult skills (e.g doctor), as 8 years of study results in the same wage as no study

• a lack of competition means that there’s less innovation and product development

• black markets multiply as the population seeks to address shortages