Question

The distribution of income is likely to be more UNEQUAL in a capitalist (market) economy compared to a socialist (command) economy. Explain why this is true. (Remember what determines the distribution of income in each type of economic system.)

Answer 1

• Market economies and command economies occupy two polar extremes in the organization of economic activity. The primary differences lie in the division of labor or factors of production and the mechanisms that determine prices.
• The activity in a market economy is unplanned; it is not organized by any central authority but is determined by the supply and demand of goods and services.
• The United States, England, and Japan are all examples of market economies, as are most developed, democratic nations.
• In this type of economy, there is a separation of the government and the market. This separation prevents the government from becoming too powerful and keeps their interests aligned with that of the markets.
• In a market economy an individual's ability to consume goods & services depends upon his/her income or other resources such as savings.
• A major cause of economic inequality within modern market economies is the determination of wages by the market. Where competition is imperfect; information unevenly distributed; opportunities to acquire education and skills unequal market failure results.
• Since many such imperfect conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential role for government to correct such market failures.
• Income is distributed based on a suppliers ability to match the demand for their product, and the demanders ability to consume the goods supplied to them.
• Alternatively, a command economy is organized by a centralized government which owns most, if not all businesses, and whose officials direct all the factors of production. China, North Korea, and the former Soviet Union are all examples of command economies.
• In a command economic system, a large part of the economic system is controlled by a centralized power. For example, in the USSR most decisions were made by the central government. This type of economy was the core of the communist philosophy.
• Since the government is such a central feature of the economy, it is often involved in everything from planning to redistributing resources.
• A command economy is capable of creating a healthy supply of its resources, and it rewards its people with affordable prices. This capability also means that the government usually owns all the significant industries like utilities, aviation, and railroad.
• In a command economy, it is theoretically possible for the government to create enough jobs and provide goods and services at an affordable rate. However, in reality, most command economies tend to focus on the most valuable resources like oil.
• In this planned system, wages, rewards, and perks are dispersed based on the social value of the service provided that is why income inequality is less as compared to market economy.