Question Gabriel Finance & Economics

Discuss in detail the merits and demerits of each of the three main economic systems ,namely free enterprise, mixed economy and command economy in solving the fundamental economic problems.

Discuss the merits and demerits of the three main economic systems ,namely free enterprise, mixed economy and command economy in solving the fundamental economic problems.

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Answer Internal Staff

1) Free economy:

Merits: Companies have reasons to provide goods and services wanted by consumers. Specifically, there is a profit motive for companies which acts as motivation for them to maintain low costs and make the best use of resources and minimise waste (Pettinger, 2007).

Demerit: In a free market, monopolies can be developed, which in turn can mean that the owners are placed in a position to establish the prices and potentially exploit the workers and consumers (Pettinger,2007).

2) Command economy :

Merits: It allows the government to overcome market failure. It can also reduce/eliminate inequality and create a society that is focused on maximising social welfare rather than profits. This form of economy can also stop monopolies from abusing their market power (Pettinger,2012a).

Demerits: There is heavy regulation and control in a command economy. This may slow innovation and enterprise, as the government may be unable to respond to consumers’ changing preferences. Governments typically have poor information about what should be produced. Centralisation means that decisions are taken by individuals that may not have access to what is really happening (Pettinger,2012a).

3) Mixed economy:

Merits: Majority of businesses and industries can be left to private firms, which are often more efficient than the government because they have the incentive to innovate, cut costs and increase profits. It can reduce the amount of control and regulation by the government, but at the same time enable some government regulation where there is a market failure (such as taxing goods that have negative externalities) (Pettinger,2012b).

Demerit: Given the nature of the economic system, it can be challenging to know when and how much government should intervene (Pettinger,2012b).

References

Pettinger, T (2007) free market economy system. Available at: http://econ.economicshelp.org/2007/09/economic-systems-free-market.html (accessed 10/09/2016)

Pettinger, T (2012a) Command economy. Available at: http://www.economicshelp.org/blog/glossary/command-economy/ (accessed 10/09/2016)

Pettinger, T (2012b) Mixed economy. Available at: http://www.economicshelp.org/blog/glossary/mixed-economy/ (accessed 10/09/2016)