Question

a. Identify and describe the 3 economic systems that govern economies around the world.

1. Outline the strengths and weaknesses of each system.  
2. What do you think is the best type of market system to govern an economy?  Why?
3. Use online resources and your textbook to identify a specific economy that follows each economic system discussed above.  
4. How have these countries done in terms of economic performance?  Has one economic system produced better economic results than others?  Please provide details from the countries you have selected.

Answer 1

1. The three major systems that govern the economies around the world are:

• Command Economic System: 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
• Market Economic system: In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced and who buys the goods. This is opposite to how a command economy works, where the central government gets to keep the profits.
• Mixed Economic System: A mixed economy is a combination of different types of economic systems. This economic system is a cross between a market economy and command economy. In the most common types of mixed economies, the market is more or less free of government ownership except for a few key areas like transportation or sensitive industries like defense and railroad.

2. Command Economic System

Strengths

• If executed correctly, the government can mobilize resources on a massive scale. This mobility can provide jobs for almost all of the citizens.
• The government can focus on the good of society rather than an individual. This focus could lead to a more efficient use of resources.

Weaknesses

• It is hard for central planners to provide for everyone’s needs. This forces the government to ration because it cannot calculate demand since it sets prices.
• There is a lack of innovation since there is no need to take any risk. Workers are also forced to pursue jobs the government deems fit.

Market Economic system

Strengths

• Consumers pay the highest price they want to, and businesses only produce profitable goods and services. There is a lot of incentive for entrepreneurship.
• This leads to the most efficient use of the factors of production since businesses are very competitive.
• Businesses invest heavily in research and development. There is an incentive for constant innovation as companies compete to provide better products for consumers.

Weaknesses

• Due to the fiercely competitive nature of a free market, businesses will not care for the disadvantaged like the elderly or disabled. This leads to higher income inequality.
• Since the market is driven solely by self-interest, economic needs have a priority over social and human needs like providing healthcare for the poor. Consumers can also be exploited by monopolies.

Mixed Economic system:

Strengths

• There is less government intervention than a command economy. This means that private businesses can run more efficiently and cut costs down than a government entity might.
• The government can intervene to correct market failures. For example, most governments will come in and break up large companies if they abuse monopoly power. Another example could be the taxation of harmful products like cigarettes to reduce a negative externality of consumption.
• Governments can create safety net programs like healthcare or social security.
• In a mixed economy, governments can use taxation policies to redistribute income and reduce inequality.

Weaknesses

• There are criticisms from both sides arguing that sometimes there is too much government intervention and sometimes there isn’t enough.
• A common problem is that the state run industries are often subsidized by the government and run into large debts because they are uncompetitive.

3. The best type of Market system is Market Economic System.

There is no government intervention in a pure market economy (“laissez-faire“). However, no truly free market economy exists in the world. For example, while America is a capitalist nation, our government still regulates (or attempts to control) fair trade, government programs, honest business, monopolies, etc.

4. Command economy – China

Market economy - Hongkong

Mixed economy – India

China has done better than Hongkong using its command economy as here it is 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.

Similarly India through its mixed economy, was able to use the best of both worlds – incorporate policies that are socialist and capitalist.