Free market and mixed economies

There are a number of approaches to organising an economy.

Free market economy: an economic system where all resources are allocated through the market forces of demand and supply, with no intervention by the government

  • Controlled by price mechanism.
  • Resources privately owned.
  • No government intervention.
  • None exist in the world.

 
Command, or centrally planned economy: an economic system where all resources are allocated by the government, with no markets (e.g. ex-Soviet bloc, North Korea)

  • Or ‘control’ economy.
  • Government has complete control – economic decision is centralised.
  • No price mechanism.

 
Mixed economy: an economic system where resources are partly allocated by the market and partly by the government (e.g. most economies today)

  • Controlled partly by the government, partly by the private sector.
  • Most developed economies are mixed.
  • Aim – advantages of the free market with all disadvantages prevented by the government

 
From the point of view of efficiency, most economists would argue that free markets are the most efficient, in terms of using their resources in the best possible way to meet the needs and wants of consumers.

However, when equity is considered, most economists would also argue that free markets lead to an unequal distribution of income and wealth, since owners of capital and entrepreneurs tend to accumulate the most income/wealth, and many people, such as the sick or elderly, are unable to work.

As a result, most  economies today are mixed economies, where markets allocate many resources, but governments intervene to different extents in order to ensure a minimum standard of living. They do this by raising revenue through taxes, and redistributing in the form of benefits and direct provision of services such as healthcare.

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