Question

Economics Development Class:  

What are the advantages and disadvantages of the market as an alternative to state planning? What economic systems could combine some of the advantages of both planning and the market? How effective are these systems? Discuss these question in the context of developing countries.

Answer 1

Under the market system, all economic decisions are taken based on the market forces of demand and supply. Alternatively, in state planning, market forces do not play any role in economic decisions.

Advantages of Free Market System:

• Under this system, producers and consumers enjoy freedom.
• Varieties of goods and services are produced in market based system.
• Firms seek to operate at most efficient scale by reducing cost as much as possible.
• Output is optimized and thus, there sharp rise in standard of living.

Disadvantages of Free market system:

• It is subject persistent fluctuations.
• it also leads unbalanced growth rate of economy, it tends to make investment where profits are maximum.
• Usually, labors are severely exploited in free market system.
• Sometimes it might also overproduce.

Mixed economic system combines the features of both systems viz. market system and planning system. Indian economic system is supreme example of mixed economic system.

Such system is more successful and less prone to frequent economic fluctuations. Most of infrastructural and public facilities are provided through the economic planning and rest of sector is dealt with by the private firms who operate with motive of profits.