1.1.6 Free Market, Mixed and Command Economies

• Free Market Economy


  Resources are allocated by the price mechanism. There is little or no government intervention and no provision of public services
• Mixed Economy


  Resources are allocated by the price mechanism and partly by the government.
• Command Economy


  Resources are allocated by the state. There is no private enterprise and no price mechanism.
• Public Sector


  Organisations that are funded and managed by the state that provide a service to people eg. NHS
• Private Sector


  Organisations funded and managed by private firms that aim to maximise profits
• Nationalisation


  The government buying a private company
• Privatisation


  A private company buying a government organisation
• Right-Wing


  Limited government intervention, low levels of tax (for businesses), limited welfare system and privatisation.
• Left-Wing


  Abundant government intervention, higher taxes for higher income brackets (and corporations), welfare system and nationalisation.
• The Invisible Hand


  A producer in a competitive market, through the pursuit of self-interest, allocates resources in society's best interest
• Trickle-down Economics


  Increasing the wealth of the rich encourages spending that distributes wealth throughout society
• Price Mechanism


  How the forces of demand and supply determine the price of a good in a free market economy
• Benefits of Free Market

  -Automatic due to the price mechanism

  -Consumer sovereignty

  -High motivation as there is a high reward for hard work

  -Political freedom

  -Increased productive efficiency

  -Higher growth
• Limitations of Free Market

  -High inequality since the rich own more factors of production

  -Lack of merit goods and little control of demerit goods

  -Resources wasted on unproductive expenses e.g. advertising

  -May create monopolies
• Benefits of Command Economy

  -Minimum standard of living

  -Less waste of resources

  -Long-term planning

  -Standardised products are more cost-effective

  -Government acts to maximise social welfare
• Limitations of Command Economy


  -The state cannot make every decision correctly so may waste resources

  -Increased bureaucracy

  -Increased corruption and bribery

  -Decreased motivation and efficiency as workers all earn the same

  -Loss of freedom
• The Government's Role in a Mixed Economy

  -Creating a framework of rules/ laws

  -Supplement and modify the price system to limit the production of demerit goods

  -Redistributes income using progressive tax or provision of public goods