Free Market and Mixed Economies - A-Level Economics
Free Market and Mixed Economies
Types of Economy
There are two components to an economy:
- The private sector is composed of private firms who use prices to ration out resources.
The public sector is the government, who are a major provider of services such as education and healthcare.
Percentage of resources allocated by the price mechanism
| 100% | 50% | 0% |
| Free Market Economy | Mixed Economy | Centrally Planned Economy |
| All resources are allocated by the price mechanism. No government intervention. | Some resources are allocated by the price mechanism and some by the government. | All resources are allocated by the government. No price mechanism. |
Mixed Economy
Mixed Economies are economies in which resources are allocated partly through the price mechanism and partly through state intervention.
A mixed economy is designed to gain the advantages of a (free) market economy, but avoid the disadvantages through government intervention.
Most developed countries in the world are mixed economies (e.g. UK, Germany).
Free Market Economy
Free Market Economies are economies in which private firms are allowed to guide the allocation of resources without state intervention. The price mechanism plays a key role, as prices provide signals and incentives to producers and consumers.
- Resources are all privately owned in a free market economy.
- Free market economies have consumer sovereignty, where consumers’ day to day spending decisions determine what is produced in an economy.
- There are no pure free-‐market economies in the world today since in every country the government controls some resources. However, in less developed countries such as Malaysia and Thailand have minimal government intervention.
Advantages
- Resource allocation is more efficient and ‘automatic’ via the price mechanism
- Reduction in consumer or producer surplus
- Greater choice provided for consumers (no government laws over production of certain goods)
- Competition between producers should lower cost and improve quality
Disadvantages
- Less equality because governments do not provide healthcare, education etc.
- The search for profit may cause environmental damage (and no government laws to stop this)
- Public goods will not be provided by private firms (e.g. defence)
- Lack of long term planning
- Irresponsible buying (e.g. no government warning people about smoking)
Centrally Planned (Command) Economy
Centrally Planned Economies are economies in which the government has total control over the allocation of resources-‐ there is no role for the price mechanism.
An example of such an economy is North Korea.
A free market economy is an economic system in which prices and production decisions are determined by the forces of supply and demand, without any government intervention.
Advantages of a free market economy include greater efficiency, as prices are determined by supply and demand; increased innovation, as firms compete to develop new products and services; and increased consumer choice.
Disadvantages of a free market economy include the potential for market failure, such as the presence of externalities or the creation of monopolies; inequality, as some individuals or firms may have more resources than others; and the potential for a lack of investment in public goods and services.
A mixed economy is an economic system in which some resources are owned and controlled by the government, while others are owned and controlled by private individuals or firms.
Advantages of a mixed economy include the ability to provide public goods and services, such as healthcare and education, that may not be adequately provided by the free market alone; the potential to regulate industries to prevent market failure; and the ability to redistribute income and wealth to reduce inequality.
Disadvantages of a mixed economy include the potential for government failure, such as corruption or inefficiency; the potential for a lack of innovation and competition in industries that are heavily regulated; and the potential for crowding out private investment in areas where the government is heavily involved.
The role of the government in a mixed economy is to regulate markets to prevent market failure, provide public goods and services that are not adequately provided by the free market, and redistribute income and wealth to reduce inequality.
Public goods are goods or services that are non-excludable and non-rivalrous, meaning that they cannot be denied to anyone and their consumption by one person does not diminish their availability to others. Examples include national defense, street lighting, and public parks.
A negative externality is a cost that is imposed on a third party as a result of the production or consumption of a good or service. Examples include pollution from factories, traffic congestion, and noise pollution.
Negative externalities can be addressed through government regulation, such as taxes on polluting firms or subsidies for firms that produce goods with positive externalities. Alternatively, the government can provide public goods that reduce negative externalities, such as public transportation to reduce traffic congestion.
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