Economies

Free market and mixed economies

An economy can be organised in different ways to produce goods and services. This ranges along a continuum from a free-market economy, through a mixed economy, and then to a centrally planned economy.

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In reality, the vast majority of economies comprise a mixture of both private enterprise (the private sector) and state intervention (the public sector), thus being mixed economies. In the UK , around 60% of resources are allocated by the private sector, and 40% by the public sector. The government is a major provider of education, health-care, defence and law and order in society. In other European economies, the size of the public sector is greater, while in North America it is greater. In all cases these are considered to be mixed economies.

A free-market economy

This is an economy where decisions on what, how, and for whom to produce are left to the operation of the price mechanism. Resources are privately owned and economic decision making is decentralised amount many individual consumers and producers. There is minimum government intervention.

There are no pure free-market economies in the world today since, in every economy, the government directly controls some resources and output. However, the proportion of government intervention tends to be significantly lower in some developing countries, such as Malaysia and Thailand, compared to the developed world. Perhaps the best example of a developed country with a relatively small government sector is Japan.

A mixed economy

This is an economy where decisions on what, how, and for whom to produce are made partly by the private sector and partly by the government. Most developed countries in the world today fall under this classification. Examples are the UK, France, Germany, Canada, Australia and Sweden.

The rationale of a mixed economy is to gain the advantages of the market economy, while avoiding it’s disadvantages through government intervention. Often, government intervention occurs to correct market failure: for example, the under-provision of merit goods such as education and healthcare, or the non-provision of public goods such as defence. Government intervention usually arises to help markets work more effectively.

A centrally planned economy (central economy)

This is an economy where the government makes the decision on what, how and for whom to produce. In a command economy, the government has control over all resources, and economic decision making is centralised. There is no role for the price mechanism.

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