Chapter 4 : Resource allocation in different economic system

• Planned economy

  • Government allocates all scarce resources based on perceived need
  • Also known as central planning
• Resource allocation in different economic systems and issues of transition

  Decision making in market, planned, and mixed economies
• Karl Marx saw the free market as unstable
• Free market economists

  • Adam Smith
  • Friedrich Hayek
• Free market economies

  • Also known as laissez-faire economies
  • Economic decisions taken by private individuals and firms
  • Private individuals own everything with no government intervention
  • Governments usually intervene by implementing laws and public services
  • Adam Smith and Friedrich Hayek were famous free market economists
  • Adam Smith's theory of the invisible hand of the market and the price mechanism
  • What to produce is determined by consumer preferences
  • How to produce is based on seeking profits
  • For whom to produce is based on purchasing power in the economy
  • Advantages of free market economies
  • Disadvantages of free market economies
• Decisions in a mixed economy

  • What to produce: determined by both consumer and government preferences
  • How to produce it: determined by producers making profits and the government
  • For whom to produce it: both who the government prefers and the purchasing power of private individuals
• Government's role in supporting enterprise

  Motivating firms and encouraging investment
• Advantages of a planned economy

  • Easier coordination of resources in times of crises
  • Government can compensate for market failure
  • Inequality in society could be reduced
  • Prevention of abuse of monopoly power
• Mixed economy

  1. Features of both planned and free economies, with different balances in reality

  2. The market is controlled by both the government and the forces of supply and demand

  3. Governments provide public goods and merit goods
• Decisions in a planned economy

  • What to produce: determined by what the government prefers
  • How to produce it: governments and their employees
  • For whom to produce it: who the government prefers
• Planned economy

  1. The government allocates all scarce resources to where they think there is a greater need

  2. Karl Marx saw the free market as unstable and argued for the "common ownership of the means of production"
• Role of the entrepreneur

  • Generate ideas and stimulate innovation
  • Rewarded for risks with profit
• Enterprise's impact on the economy

  Creation of wealth and jobs
• Disadvantages of a planned economy

  • Governments and markets may not be fully informed on what to produce
  • May not meet consumer preferences
  • Limits democracy and personal freedom
• The government can use taxation to influence the distribution of income
• Taxes are used by governments to raise revenue, redistribute wealth and reduce inequality.
• Income taxes are paid on earned income such as wages or salaries.
• Progressive taxes take a higher proportion from high-income earners than low-income earners.
• Regressive taxes take a lower proportion from high-income earners than low-income earners.
• Direct taxes are paid directly to the government, such as income tax or council tax.
• Indirect taxes include VAT, excise duties, and import tariffs.