TYPES OF ECONOMIC SYSTEMS COMPARISON

CHARACTERISTICS 1 2 3 4 Ownership of property Motive/Objective Mechanism of Allocation Freedom of choice (in production i.e. enterprise and consumption) Competition MARKET ECONOMY Private ownership Profit maximization PRICE MECHANISM (mechanism of demand and supply) Private individuals can choose whatever & wherever they want to produce and consume(freedom) Freedom of enterprise leads to increased competition among private firms Minimum role of govt. in economic affairs. Only limited to maintenance of law and order in the country COMMAND ECONOMY Govt. ownership Collective social welfare RATIONING MECHANISM (mechanism of central planning & quotas or rations) Central authorities direct and decide the types of goods produced & consumed (no choice) All firms are govt. owned and the govt. avoids competition to prevent duplication of goods All economic and non-economic affairs are in the hands of the govt. MIXED ECONOMY Both private and govt. Private sector : Profit maximisation Public sector : Collective welfare Private sector : price mechanism Public sector : rationing mechanism Private sector works under the supervision of the govt. and the public sector is directly controlled by the govt. Competition is encouraged in the private sector and usually absent in the public sector Govt. s role is the provision of necessary goods and services and to keep an eye on the performance of the private sector to protect the society

Role of Govt. (in allocation of resources i.e. to decide what to produce, how to produce and for whom to produce) Variety of goods and services

Quality of goods and services

Bureaucracy

Freedom of enterprise and competition leads to a variety of goods produced in the economy Competition and presence of profit motive force firms to enhance the quality of goods and services Least interference of govt. eliminate bureaucratic hurdles in economic activities Quick response to changes in consumer preferences Efficient allocation of resources( by price mechanism) Sometimes inefficient e.g. private monopolies Price mechanism clears market and there are no shortages and surpluses Profit motive of private firms will result in the

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Response to changes in consumer preferences Efficiency (producing most desirable goods with least cost methods) Shortages and Surpluses (Shortage : demand > supply Surplus : supply > demand) Merit goods (Those goods which

Central agencies concentrate more on the no. of people satisfied and ignore the variety of goods Lack of profit motive and competition make it less sensitive to the quality of goods produced Complete control of govt. leads to bureaucratic system where higher govt. authorities control every affair Very slow response

Private sector provides a large variety of goods and services but the public sector concentrates on public and merit goods Private sector : high quality Public sector : mostly poor quality Significant bureaucratic element are present especially in third world countries Private sector : quick response Public sector : slow response Private sector : mostly efficient Public sector : mostly inefficient

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Inefficient allocation of resources because of absence of price mechanism

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Central planning are unable to predict the exact quantities demanded & therefore shortages and surpluses exist Due to the collective welfare motive, the

Private sector : no shortages and surpluses Public sector : present but less than command economy Private sector : underprovision

TEACHER : AHMED JAVED

are good for the society and will be underprovided if left on private sector e.g. healthcare, education,etc 14 Public goods (goods only provided by govt. with characteristics of non-excludability, nonmarketability and non rivalry. E.g. street lights, national defence Demerit goods (goods thought to be bad for the society and will be overprovided by the private sector e.g. alcohol, drugs) Even distribution of income (disparity between rich and poor)

production of merit goods to the extent it is most profitable, so underprovided

govt. produces merit goods for all members of the society, even for the poor

Missing markets of merit goods will be supplied by the govt.

Private firms cannot provide public goods because of their free-rider problem and nonmarketable nature

Provides public goods

Public sector provides public goods

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Private firms under profit maximization motive will produce demerit goods ignoring their external costs

Does not produce demerit goods

Consumption and production will be discouraged by high taxation and laws.

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Useless duplication of goods and services Negative externalities (e.g. noise and air pollution, water pollution, congestion, etc) Necessities and Luxuries

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Private Monopolies

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Existence in the real world

Lacks of any redistributive mechanism of income. Rich will become richer, poor will become poorer Freedom of enterprise might result in useless duplication of goods and services and wastages of societys scarce resources Private firms may create negative externalities in an attempt to reduce their private costs under profit maximization motive Profitability of luxuries is higher than that of necessities, so private firms will produce more luxuries and less necessities Private monopolies may develop and exploit consumers by setting high prices and restricting their output NO

Even distribution of income to increase total social welfare

Progressive taxation and welfare payments to the poor will reduce the disparity between the rich and poor. Useless duplication of goods and services might be present in the private sector but not in the public sector. Govt. will regulate the amount of negative externalities by imposing laws and taxes.

No useless duplication of goods and services

Minimum

Provides more necessities than luxuries

No private monopolies

Private sector : necessities and luxuries Public sector : necessities will be provided to even those who cannot pay Govt. regulates private monopolies and safeguards consumers from exploitation. Only mixed economies exist in the real world but the size of the public and private sector may vary from country to country -

NO

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Other names used

Free economy, capitalism, free market economy, laissez faire

Communism, planned economy, centrally planned economy

TEACHER : AHMED JAVED

TEACHER : AHMED JAVED