Economic systems – how economic resources are allocated, страница 3

5.  A very limited role for government

A market economy is often described as a free enterprise economy, where the word ‘free’ means ‘free from government controls’. A government has very few economic functions in a market economy. Early economists who were very much in favour of the market economy thought that the main business of government was to secure the defense of the country and to maintain law and order.

Command economies.

These economies are so named because the government has the power to command the nation’seconomic resources. It has complete control over the way these resources are used.It is the government which decides how land, labour and capital shall be employed.  It has the powers to deside what shall be produced, how it shall be produced and for whom it shall be produces.These economies are generally described a centrally – planned economies.Some of the main features of this type of economy are set out below.

1.Public ownership.

A most important feature of command economies is the public ownership of the means of productions.The land and all types of capital are owned by the state. Private ownership is usually limited to personal prossessions, although small business are sometimes privately owned ,and farm workers are often allowed to own small plots of  land and sell their produce on local markets.

2.Planned productions

Production is carried out according to a national plan which sets production targets for the different industries.Resources are allocated to industries by government directives. In this type of economy, resources are directed to different uses by the government.In the market economy,resources go to the highest bidders – the successful firms are able to often higher prices for the service of land, labour and capital.

A national plan consists of thousands of very complicated relationships.The planned outputs of the various enterprises ( mines, factories,farms, power stations, stations, steelworks, etc.) must all be fitted together.For example, the planned output of a large steelworks becomes the planned inputs of many other industries that use steel.A large number of officials are required to prepare and operate a national economic plan.

3. Prices.

In a centrally-planned economy,prices are not free to change in response to changes in supply and demond; they are fixed by the government.In a market economy, a shortage of a commodity will cause its price to rise.In a command economy, a shortage will often mean that some form of physical rationing has to be used.


In a market economy, the main incentive for firms to supply goods and services is the prospect of makihg a profit.This is not the case in a command economy.Enterprices are not privately owned and there are no shareholders. They do not produce for profit; they produce what the government thinks will be in the best interest of the people.

Mixed economies

In the real world, there are no comletely planned economies. In the centrally-planned economies such as those of the USSR and the countries of Eastern Europe, we find some features of the market economy, and some use is made of the price meachanism. For example, if there is a shortable of workers are particular industries or region, workers are not normally directed to where the shortages exist. Workers are often attracted to where they are most needed by being offered higher wages.

Similarly, there is no example of a completely free market economy. In all of the so-called market economies. They have both a public and a private sector; some enterprices are owned by the state,while some are privately owned. But there are very important differences.

Communist countries lean very strongly towards the fully planned economy –there is relatively little private ownership, and the market system plays little part on the way the economy is run. In the non-communist countries,far more reliance is placed on private ownership,the price mechanismand free markets.

The term ‘mixed economy’ is commonly used to describe the economies found in North America,Western Europe,Japan and other development countries in the non-communist world.In the UK, which is a typical mixed economy, about 26 per cent of the labour force is employed in the public sector and about 74 per cent in the private sector.