Free Market vs Planned Economy

Topics: Planned economy, Market economy, Mixed economy Pages: 4 (1260 words) Published: July 15, 2013
A market economy is an economic system where the factors of production, are privately owned, consumers and producers are motivated by self interest, the level of competition in the markets is very high and resources are allocated through the price mechanism. The definition is supported by Lipsey (1992) who also state that decisions about resources allocation are made without any central direction but instead as a result of innumerable independent decision taken by individual producers & consumers hence in the market economy the individuals or market makes the ultimate decision in allocation of resources. Whereas the planned economy is one in which the coordination of economic activity so essential to the viability and functioning of a complex social economy is undertaken through administrative means commands, directives, targets and regulations rather than by market mechanism. The dictionary.com defined this economic system as a socialist economic system in which production and distribution of goods and services are controlled by the government and industry is mostly publicly owned.

Provision of public goods
These are goods that are non rivalry in consumption and non excludability as alluded by Stanlake (2000) He also added the examples of public goods which includes national defences, the police service, flood control schemes, street lighting, pavements and public drainage hence they often have large external benefits relative to private benefits. In a market economy, production of public goods will not be provided or is limited because producers cannot withhold the goods for non –payment since there is no way of measuring how much a person consumes, there is no basis for establishing a market price. However in a planned economy there is provision of such goods because the government makes all decisions on what is produced. Hall (2010) mentioned that public goods cannot be provided privately because of their non diminishability and non –excludability...

References: LIST
Beardshaw,J. et. al (1998) Economics a student`s guide,5th Edition, Prentice Hall.
Dictionary.com unabridged. Available at http://dictionary.reference.com/browse/market economy (accessed 3July 2013)
Hall, R. and Lebierman,M.(2010)Microeconomic principle and application,5th Edition,Cengage learning
Lipsey, R. and Harbury, C.(1992)Principals of economics,2nd Edition, Oxford: Oxford university press.
Lipsey, R. and Chrystal, A.(1995)An introduction to positive economics ,8TH edition, London: Oxford university press.
Stanlake, G. and Grant, S.(2000)Introductory economics, 7th Edition,London:Longman.
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