LO:
a) The distinction between free market, mixed and command economies: reference to Adam Smith, Friedrich Hayek and Karl Marx
b) The advantages and disadvantages of a free market economy and a command economy
c) The role of the state in a mixed economy
a) The distinction between free market, mixed and command economies: reference to Adam Smith, Friedrich Hayek and Karl Marx
b) The advantages and disadvantages of a free market economy and a command economy
c) The role of the state in a mixed economy
Command Economy
An economy that is completely run by the state, which decides how resources are used (Karl Marx).
Advantages
+ state can place restrictions to ensure the economy is operating at an optimal level that improves the welfare of all people without negative effects (e.g. environmental damage) + state can ensure goods are provided that would otherwise not be supplied by the market (usually as it is not profitable) e.g. street lighting |
Disadvantages
- state may not have the correct information to make effective policies - the state may be corrupt and make policies that benefit large companies who do not work in the interest of the consumers |
Free Market Economy
A free market economy lets the market, consumers and producers, decide how resources should be used without intervention from the state (Friedrich Hayek).
Advantages
+ firms can decide how to function + consumers can buy what they want + usually more efficient in determining what consumers want and how to provide it compared to a government + more freedom exists |
Disadvantages
- market failure exists without government correction (e.g. excessive smoking and drinking) |
Mixed Economy
A mixed economy is a mixture of a command and free market economy. State intervention only occurs when necessary (Adam Smith).