The main features of a market economy and compare them to a command economy

For any economic society to survive it must first choose a suitable economic system best suited to the country and will allow the countries people to produce goods and services for the consumer. There are 3 main economic systems that exist in the world today such as a market economy, command economy and mixed economy.

No one economy in this world today is either wholly a market economy or command economy. There are only mixed economies, this is because no economy is fully run by the state or has no state intervention whatsoever. All economies though will face the same questions but the way they answer these questions is how these economies differ. These problems are in the form of three different questions – what will be produced? How will they be produced? Who gets what is produced?

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A market economy tries to solve these questions with only enough government regulations to protect property rights against theft and aggression. The way it does this is be allowing free play in the market meaning that anyone can take part in the economic activity. This free play system is often referred to as laissez-faire which translates to ‘let it be’, meaning that if it isn’t wrong, don’t change it. This laissez-faire system allows entrepreneurs the freedom to buy what they want and sell what they want, to whoever they want. This system also allows the consumer to spend their money however they please without having to worry about paying any such taxes as there are state owned services.

This is possibly the most important aspect of the market economy as it allows the producer to determine what the consumer really wants by listening to their demands and then deciding how they use their economic resources to meet these demands. This is the basic way in which the price system works. The price system is a way of communication between the entrepreneurs and the consumers.

The producers will supply a certain amount of a good or service and then by consumers using or buying the god or service the producer can determine whether or not the good or service is in high or low demand, this ultimately is what determines the price of the good or service. So if the supply of the good or service is low and the demand is high the price of that good or service will also be high allowing the entrepreneur to make a profit as the cost of producing the good or service is a lot lower than the producer can charge for it allowing them to make a high revenue and ultimately a high profit.

In a market economy no company is owned or operated by the state, meaning that everything is privately owned by entrepreneurs and investors. The downfall of this is that needs are not catered for, only demands. However, the goods and services that are demanded are not necessarily those which are best for you. These are known as demerit goods (the opposite of this is a merit good. Merit goods or services are those which are good for you). The downfall of only catering for demands is that people that really need basic things such as food and water will not be able to afford them as they will have a high price due to the high demand of these goods, therefore only those who can afford to pay a the high price for these goods will get them.

If we think of this in terms of services it means that only those children who have incredibly rich parents will be able to attend some sort of schooling as there will be no state funding for schools or those who can’t afford to attend to school. So in effect if Britain was purely a market economy we will probably be an awful lot like a LEDC (less economically developed country) where there will be a lot of poor people living in conditions such as that of a favela and others who would be able to afford a comfortable living standard – a good example of this would be Brazil, where 11.4 million out of 190 million of the inhabitants live in favelas where not all of them have what we call the basics for living, e.g. electricity and running water.

Having a market where only demands are catered for means that those who are poor wouldn’t be able to afford the healthcare which we all take for granted, consequently if the need for medical attention should arise, only those who had enough money to pay for their surgery/medication/vaccination would be given this service whereas if you needed the exact same surgery/medication/vaccination and could not afford it you would not be given the same service of healthcare as there is no tax-payer funded state health service. If we think of a market economy in terms of goods it means that things people demand will get produced over things that people actually need. For example, if one company produces an amazing drink which everyone loves but it is in fact extremely bad for your health in the long run; but a second company produces a second drink which tastes really bad but will be beneficial for your health in the long run, people will buy the drink which is bad for you, based purely on the fact that it tastes good.

Therefore the first company can charge more for their drink as it is in high demand but the second company will have to put their prices down so as to make their drink seem more attractive. The problem with putting the price of your drink down is that over time it will be harder to make a profit so the company may go bust, but before then the company may decide that if it is to stay afloat it is to make something people will want to buy and what people want to buy is the drink that is bad for you. Thusly the second company will create a drink similar to that of the first company; this creates competition between the companies where each will battle it out with their prices to make the biggest profit. However, if the first company no longer wishes to compete with the second company, the first company could buy them out, this is called creating a monopoly or monopolising, which gives the first company exclusive power or control over the good. The same can also be done for services.

As much as there are cons to living in a market economy there are some pros. If companies become monopolised there will only be one brand which means things will stay at one even price so prices will not fluctuate from week to week like they would with competition. Secondly it gives people the incentive to work. What I mean by this is that if people are provided for by the state with benefits there is no incentive there for them to work, whereas if people no longer receive money from the state and things such as healthcare and schooling are not free people will actually have a reason and incentive to work. The incentive being that they will not be able to afford to survive without an income.

A command economy is very much different from a free market economy as companies are not run by private investors and entrepreneurs but instead by the government and then government dictates to those companies which good or services they will produce. One famous example of this is when Joseph Stalin turned Russia into a command economy in just 24 hours.

In a command economy companies will produce goods and services so as to meet needs and not demands. Ergo, services such as healthcare and education are provided by the state so as everyone can get an education and any medical assistance they may require.

The reason the state can offer these services free of charge is because the vast majority of the country’s population will pay taxes so in actuality these services aren’t free. These taxes don’t just go towards providing free healthcare and education; it also goes towards providing some citizens with benefits. Benefits are good in the sense that they provide people with an extra source of income so as they can afford to pay their bills and buy food, but they can also have an adverse effect in the sense that it gets rid of the incentive to work. By this I mean that if people believe that they can just live off of money provided by the tax payer then they have no reason to need to work as they do not need to go out and earn an income as one is merely handed to them.

An advantage of a command economy is that prices are set by the government so everything is subject to a fair price so as the majority of people, regardless of income can afford the goods. The downfall of this is it doesn’t allow for the price competition, competition can be good as companies will compete to get the most customers which means they will drive their prices down in a bid to outsell their competitors.

The biggest disadvantage of a command economy is that they are unable to efficiently allocate goods due to the knowledge problem. This means that the central planner (in the UK this would be the Prime Minister) does not have the ability to discern how much a good should be produced, this is because one person cannot take control over everything and get it all right. Shortages and surpluses are a common consequence of command economies.

Which is the best system?

In my opinion I don’t believe that one system is truly better or worse than another. I think that the best system is to have a bit of both, but not 50-50. I think there should be more elements of a free market economy than the command economy. The reason I say this is that with a command economy too many people believe that they can just sit back and real on the state to fund their lives as it is too easy for people to get benefits. However, with a market economy there is an incentive to work as the state doesn’t provide citizens with benefits and people actually have to go out and earn a wage to provide for themselves and their family. Also with a market economy consumers send signals to the producers about what they should be creating and in what quantities, resulting in a much more efficient allocation of goods.

Although I think we still need to have some input from the government so as all children can have an education and everyone can have access to some sort of healthcare without having to pay the extortionate amounts that would come with a market economy.