1.1.6 Free market economies, mixed economy and command economy

Question 1

Command economies/ centrally planned economy

Answer 1

the means of production is owned and controlled by the government (communism)

Question 2

Mixed economy

Answer 2

the state owns/ controls some of the economy

Question 3

Free-market (pure) economy

Answer 3

resources are privately owned and prices are determined by the force of supply and demand

Question 4

Smith views on economies

Answer 4

• Economies function most efficiently and fairly when individuals are allowed to pursue their own interests
• the greatest threat is government intervention

Question 5

Hayek views on economies

Answer 5

• critical of command economies
• he said it was impossible for the government to process the information required to distribute resources effectively

Question 6

Marx views on economies

Answer 6

• flaws of free market
• the free market economy would break down because the owners of business made huge profits at the expense of workers

Question 7

Positive features of a command/centrally-planned economy

Answer 7

• Zero unemployment
• Zero inflation
• Everyone is equal (some more through party structure)
• No wasteful advertising & unnecessary luxury goods

Question 8

Negative features of command/ centrally-planned economy

Answer 8

• No incentives
• Chronic shortages (rationing)
• Minimal consumer good production
• Unnecessary surpluses (price mechanism disregarded)
• Secondary markets appear (black markets)
• Vast bureaucracy to guess on requirements (the planning process)
• Lower material living standards & poor quality of production (e.g Cuba)

Question 9

Outcome of command/ centrally-planned economies

Answer 9

• Productive and allocative inefficiency

Question 10

Examples of command economy

Answer 10

• Most fell following the collapse of the USSR
• Cuba now implementing reforms
• North Korea and Laos

Question 11

Positive features of free market economy

Answer 11

• most efficient (using resources in the best possible way to meet the needs of consumers)
• Incentives appear
• Privately owned means of production
• Profit motive (capitalism)
• Price mechanism guides resource allocation
• Winners & loser appear (individuals, firms)

Question 12

Negatives of free markets

Answer 12

• leads to an unequal distribution of income and wealth since owners of capital and entrepreneurs tend to accumulate the most income/wealth (Gini coefficient)
• Many people (sick or elderly) are unable to work
• monopolies arise = disadvantages of monopolies (evaluation: the benefits of monopolies)
• under provision of public goods
• unstable

Question 13

The role of the state in a mixed economy

Answer 13

Governments intervene by raising revenue through taxes and redistributing income in the form of benefits and direct provision of services such as healthcare

Question 14

How do mixed economies arise?

Answer 14

• they arise because of market failure
• Public goods wouldn’t be produced (defence/ health/ education)
• inequality appears which may be socially undesirable (so tax & redistribution)
• markets tend to become monopolies if left unchecked (so nationalise)

Question 15

Positive features of a command/centrally-planned economy

Question 16

Positive features of a command/centrally-planned economy (no wasteful advertising & unnecessary luxury goods)

Answer 16

• Since the govt aim to maximise social welfare rather than profit therefore they produce goods which benefit society

Question 17

Command economy example

Answer 17

• After 1959, in Cuba, all private businesses became state owned.
• There were too many workers and no incentive since products were homogeneous
• E.g taxi were allowed private license therefore they are paid more than Doctors since their salaries aren’t set by govt
• Consequence = highly trained workers moving to private sector and black market

Question 18

Positive features of a command/centrally-planned economy (no wasteful advertising & unnecessary luxury goods) evaluation

Answer 18

• the govt have poor info about what to produce e.g Soviet Union producing goods that weren’t used
• also chronic shortages or unnecessary surpluses since price mechanism disregarded so they are unable to respond to consumer preference = poor quality
• e.g Cuba

Question 19

Negative features of free market economy (under provision of public goods

Answer 19

• merit goods
• e.g defence, non-rivalry/non-excludable

Question 20

Negative features of free market economy (unstable- Keynes)

Answer 20

• Keynes on Capitalism has a tendency to boom & bust
• this causes mass unemployment which is unsustainable in the long run due to the over-use of raw materials

Question 21

Advantages of mixed market economy

Answer 21

• incentives to be efficient
• reduces market failure
• macroeconomic stability

Question 22

Advantages of mixed market economy (incentive)

Answer 22

• they have a profit incentive to cut costs and be innovative

Question 23

Advantages of mixed market economy (reduces market failure)

Answer 23

• It enables some govt regulation where there is market failure
• E.g regulation on the abuse of monopoly to prevent excessively high prices
• Taxation on negative externalities

Question 24

Advantages of mixed market economy (reduces market failure) evaluation

Answer 24

• It can be difficult to know how the govt should intervene
• E.g discretionary fiscal policy can lead to alternative problems such as govt borrowing
• can lead to govt failure (libertarians say gov can be influenced by political and short-term factors)
• Adam Smith: ‘Wealth of Nations’ govt needs to present the exploitation of monopoly

Question 25

Disadvantages of mixed market economy

Answer 25

Too much inequality = can allow too much market forces = inequality and inefficient allocation of resources (socialist)

Question 26

A is not correct because Hayek promoted the idea of
private investment rather than government spending
B is not correct because Hayek was a critic of command economies allocating resources, advocating instead the
many price signals in a free market economy
C is not correct because Marx was a critic of the free (1) market economy allocating resources

Karl Marx criticised the private ownership of factors of production