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,1. Economic System
Advantages and Disadvantages of Planned and Market economy
Discuss whether resources are more effectively allocated in a planned economy or in a market economy [12m]
Discuss whether the transition of an economy from one that is centrally planned to one in which resources are
allocated through the free market is likely to be of overall benefit to the citizens of that economy [12m]
Planned economy: Economy where all economics decisions are controlled by the government of central
authorities. Government takes full responsibility of allocation of resources
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Free market economy: Economy without any government intervention where prices are allocated through the
price mechanism. In other words, prices of goods and services are determined by the market forces of supply and
demand. Adam Smith refers to this as the ‘invisible hands’ in the economy
Advantages of Planned Economy
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- Overcome market failure
- Prevent abuse of monopoly power
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- Prevent unemployment and overproduction of demerit goods
- Maximizes welfare of people by providing public goods and preventing underproduction of merit goods
- Ensure equal distribution of income and wealth between the poor and rich by taxing the rich more, bridging the
gap between the poverty and the wealthy ot
Disadvantages of Planned Economy
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- No economic freedom as business objectives are limited and products are not produced based on consumer
preferences
- No profit incentive or motivation which results to inefficient productivity
- Inefficient firms and business are kept going which is a waste of resources
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- Shortages and surpluses in the market due to lack of price signal
- Greater scope for government corruption
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Advantages of Free Market Economy
- Resources allocated efficiently to where expected profit is the highest
- Economic freedom where consumers can choose the products they desire
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- More competition which drives innovation and invention, producing wider range of better quality products
- Increase efficiency, keeping cost low and production high
Disadvantages of Free Market Economy
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- Overproduction of demerit goods with negative externalities such as increase crime and pollution
- Monopolies abuse their power and increase prices, misleading consumers and results in the poor unable to
afford for the good
- Increased gap between poverty and rich
- Lack of public goods due to free rider problem
Disadvantages of Transitioning Economy
1. Rise in unemployment
- Privatization of firms means there will be increase competition between firms.
- Firms wants to cut cost e even change or capital intensive method. Hence inefficient and unprofitable firms are
forced to shut down, increasing unemployment rate.
, 2. Rise in inflation
- Price controls impose by government has been removed and firms charge prices
that are of real cost of production
- Some entrepreneur and firms sole incentive is to make profit so they will exploit their position and charge high
prices
3. Increased in inequality and gap between the rich and poor
Conclusion
Pure approach to planned or free market economy does not work. A combination of the two at a level should be
able to produce consistent results and benefits for the economy. Hence mixed economy which involves a certain
degree of government intervention will be the best economic system choice.
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