Types of economic systems

Types of economic systems

Businesses operate in a particular economic system. Each country must decide what type of economic system it will adopt to make the best use of its resources. There are three main ways in which a country can organise its resources. These are:

  Free market economy

  Command or ned economy

  Mixed economy

Free market economy

In a free market system all decisions regarding the production of goods and services are made by citizens of the country. In this system the economy is governed by supply and demand without any interference by the state: there is no government control over land , capital and labour. There are no examples of a true free market economy in the world.

There are advantages and disadvantages associated with this type of economic system:

Advantages

Businesses compete with each other so producers supply goods at lower prices

Consumers are free to choose what they want to buy

There are low or non-existent taxes

Disadvantages Businesses may create monopolies to control market prices

The government doesn't provide any goods or services, such as   education and health care. These services are available only to people who have the money to buy them.

Command or ned economy

In a command or ned economy, all ning and direction of economic activity is done by the government or the state. The state decides:

  what products should be produced, in what quantity and at what price they should be sold

  who should be employed and how much they should be paid, people have little choice both as consumers and workers.

The clearest examples of ned economies are the communist system which existed in Russia before 1989 and still exist in China.

Mixed economy

This is an economic system which combines some elements of a free market economy  and some elements of a ned economy. Almost all the major economies in the world, including those of the European Union and the USA, are mixed systems where a private and a public sector exist.

The private sector is the part of the economy that is owned and controlled by individuals and firms. These businesses are free to decide what goods to produce and what price to charge for them.

The public sector is the part of the economic that is owned by the state. The government will decide what goods or services to provide and how much to charge for them. Some goods or services are offered without any charge to the consumers and are typically provided by the state for example defence, the police, the transport systems and education.

Privatisation

Most countries have a mixed economy in which some goods and services are provided by the state and the rest by the private sector. Many governments have sold off businesses they previously owned to private enterprises: this is called privatisation. For example, the electricity and water supply and public transport systems have been privatised in many European countries.