1e. Economic systems and thinkers

Free Market Economies

Advantages	Disadvantages
The profit motive and competition could lead to lower prices and the creation of new products	Consumers may not have enough information to make choices or may act irrationally e.g. smoking
Consumers have the freedom to buy and work for who they want	System prone to ‘boom and bust’ e.g. Financial Crisis
The invisible hand will ensure the right quantities of goods and services are produced	Over provision of ‘negative externalities’ e.g. pollution
Incentive for labour to work hard	Under provision of ‘positive externalities’ e.g. education
	Potential exploitation of workers and consumers by monopolies
	High levels of inequality
	No provision of public goods e.g. street lights

Command Economies

Advantages	Disadvantages
Greater income equality as resources are distributed by the government	Without the profit incentive, there is less need for the government to create new products
Externalities should be eliminated as the government considers the total benefits and costs to society	High levels of bureaucracy
With one producer there should be increased efficiency through economies of scale (e.g. London Underground)	The government may not have enough information to know what consumers need
	Consumers have little economic freedom and choice
	Prices are often kept low leading to shortages and queues

The role of Government in an Economy

Promote competition by breaking up monopolies
Directly running industries (nationalisation) as they are public goods or can’t be
provided efficiently or equitably by the free market
Protecting consumers through price caps
Protecting producers and workers through minimum prices/wages/tariffs/quotas
Ensure consumers are well informed through information provision
Nudge consumers to make rational decisions
Redistributing income through progressive taxation and transfer payments
Regulations/permits/taxes to ensure that negative externalities are eliminated
Subsidies to make products more affordable, support producers or encourage positive externalities
1. Keep inflation under control through the use of monetary policy
2. Reduce the effects of boom and bust through discretionary spending/taxation and
  automatic stabilisers
3. Enforce contracts and property rights

The Public sector

The public sector refers to any service or industry owned by the state, for example:

National Health Service
Emergency services
Armed forces
State education

Advantages	Disadvantages
JOBS - Usually protected, reducing unemployment.	HIGHER COSTS - Providing these services means higher costs and higher taxes.
RESOURCES - Key supplies, e.g. water and energy, can be guaranteed and controlled.	INEFFICIENCY - Large non-profit making organisations suffer from diseconomies of scale.
ESSENTIAL SERVICES - Health, education, housing, and transport are guaranteed for everyone.	GOVERNMENT INTERFERENCE - Politicians' interference can negatively affect the efficiency of an organisation

The Private Sector

In the private sector, most businesses are sole traders, partnerships, or limited companies (see Sole traders and partnerships and Limited Companies). Other types of ownership include franchises and co-operatives.

Advantages	Disadvantages
Competition should lead to lower prices and better quality goods	Desire to increase profits might mean lowering wages and quality as much a possible
Profit incentive means people might work harder	Unequal access to essential services
Government can distinguish between income and corporation tax	Increase in all types of inequality
The government might be able to lower taxes if essential services are funded by individuals
High profits could mean more research and development and therefore improved goods

	Free Market	Command	Mixed
Resources owned by:	Individuals	State	State & individuals
Who decides what is made?	Consumers decide indirectly – prices act as a signal	State decides	The state provides necessary services, and the private sector meets consumer wants
How is it made?	The most efficient means of production in order to minimise costs and maximise profit	State plan based on inputs (available resources) and desired outputs	Combined public and private sectors

Why are most economies mixed?

A command economy leads to inefficient production, less choice and innovation
A free market system leads to inequality, exploitation, pollution and a lack of essential services
A mixed economy has the best elements of both

Economic thinkers

Economist	Favoured System
Adam Smith	Free-Market/Mixed - The invisible hand of supply and demand guides the market to an efficient outcome. However, this relies on the absence of monopolies, so the government needs to ensure that there are low barriers to entry, as well as other interventions to correct market failures.
Karl Marx	Command Economy - Capitalist societies exploit workers and are unstable so a communist system is preferable.
Friedrich Hayek	Free-Market - Due to the complexity of economic production, the free market should provide all goods except public goods
Keynes	Mixed - The free market is needed to allocate goods and services, but the government needs to intervene to steer the economy.