Question

Briefly define, in your own words, the concepts of capitalism and socialism. Then list three pros and cons of each.

Answer 1

Formal economies work within the limits of the policies and regulations that are developed and monitored. Capitalism is organized capitalism, and socialism. The major differences between capitalism and socialism revolve around government position and economic equality. Capitalism offers economic independence, competition for customers and economic growth. Socialism, which is a state-controlled economy organized by a central planning body, allows for greater social stability and reduces the volatility in industry.

Capitalism's benefits include: consumer preference-consumers choose what to buy, and that preference leads to greater competition and better goods and services.
Economic efficiency-Products and services manufactured on a demand-based basis generate opportunities to reduce costs and eliminate waste.
Economic growth and development (which is possible in the form of capitalist economy)-It raises the gross national product and leads to an improvement in living standards.

Capitalism's drawbacks include: a risk of a power monopoly-companies with monopoly power (when a single individual or company is the sole provider of a particular commodity) may exploit their status by charging higher prices.
Inequality-A capitalist society is built on the right to pass on wealth to generations to come. If all the wealth is owned by a small group of people and that wealth tends to be passed down to the same groups of people, inequality and social division occur.
Recession and unemployment-An economy that is based on the consumer and producer market will inevitably undergo growth and decline.

Socialism Pros Removal of relative deprivation. A welfare state that provides a guaranteed basic income for those who are unemployed, disabled or unable to work ensures a decent standard of life for the poorest in society, which helps minimize relative poverty.
Healthcare free. At the point of usage free healthcare means that everybody has the right to basic healthcare. This increases the quality of living of those who can't afford to pay private physicians. It also leads to improved labor productivity and longer-term economic growth by improving the wellbeing of nations

Socialism Cons: Lack of opportunities. If an economy has high progressive taxation rates, it may create disincentives to work and start up businesses. Entrepreneurs may like they would prefer not to take the risk or work abroad if the government is taking a high percentage of their income. In the modern world, living overseas in tax havens and free-ride on tax-paying others is simpler for the super wealthy. If tax rates are too small, they can be self-defeating and not boost tax revenues significantly

Failed administration. The government will excel in controlling corporations, labor markets and operating public enterprises in an ideal environment. However, government intervention is prone to government failure and an inefficient allocation of resources. Labor market regulations such as high minimum wages or maximum working week, for example, may lead to unemployment and a lack of flexibility that businesses need to cope with unexpectedly growing demand. If businesses are heavily regulated, this is an additional expense that may deter investment and lead to lower economic growth.