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Assess the relative merits and demerits of a market economy. Why have each East European economy experienced problems in their transition from planned to more market economies?

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Introduction

* Assess the relative merits and demerits of a market economy. * Why have each East European economy experienced problems in their transition from planned to more market economies? A market economy is defined as an "economic system, which resolves the basic economic problem mainly through the market mechanism." There are four main type of actors within the system which are consumers, producers, owners of private property and the government. In a pure market economy, it is argued, that consumers, producers and property owners are selfish in that all their decisions are based upon private gain and maximising their individual welfare. For example producers strive to maximise profit whereas the owners of production aim to maximise rent, wages and profits. Adam Smith argues that although economic actors pursue their own self-interest, the result would be an allocation of resources in the economy, which would benefit the society as a whole, and he refers to this concept as "the invisible hand." However it is presumed that the government is motivated to act in the best way possible for the welfare of the community as a whole and not personal gains. In market economy owners of the factors of production as well as producers have the right to buy and sell what they want and when they want, through the market mechanism. Therefore strong competition will exist. Producers compete for the spending of consumers and workers compete for employers and jobs. ...read more.

Middle

Another merit of the market economy is that producers must be efficient because if they are not they will either make huge losses or will be driven out of business by other companies. Also market economies are very dynamic as shown by Japan which has grown faster than the USA over the past thirty years. However market economies have no link between need and allocation of resources, e.g. food will be sold to the person who can pay for it rather than those who are starving and will die if they don't get anything to eat. In a market economy many people are likely to have a little or no income at all through no fault of their own. Examples of these groups are the old and handicapped. Individuals take great care to reduce the risks associated with a market economy, they can insure themselves against sickness and unemployment. However yet again this is limited to those that can afford the monthly premiums. Ultimately a market economy segregates society into two groups, the rich and the poor. It makes the rich richer, and the poor, poorer. Thus it seems that the advantages of a market economy are not as simple and as great as they first appear. In the late 1940`s and early 1950`s, Eastern European countries became command economies, following communist take-over. However since the 1990`s they have transferred themselves into more market economies. It is inevitable that such a dramatic transition would reduce output. ...read more.

Conclusion

tenants of council housing could be given their accommodation. The problem with this is that it is a very arbitrary and unfair way of sharing out the state owned businesses and capital. This would divide society into the rich and poor. The state could also sell its assets to the highest bidder and use the proceeds to reduce tax or reduce government debt. Despite all these problems the change was necessary for two main reasons. Firstly the command systems were based on repressive political structures that could only be run at the expense of personal freedom. They rely on ordering people to take certain actions, they are very autocratic. To regain personal freedom individuals had to regain economic freedom. This necessitated a move to a more market orientated economy. Secondly in planned economy production was very inefficient, shops were all too often empty. Goods and services that were produced were of a poor quality. Workers were getting second, often illegal jobs, which they worked much harder in since they did so little in their official state job, e.g. 100 workers were employed when 50 could have done the job. Therefore the decision to become a market economy was an attempt to be efficient and produce high quality goods. In conclusion the problems faced by East European countries were inevitable as such a change, from an autocratic to a lassiez e faire structure could not be accomplished without any teething problems. All the companies and individuals needed time to find their feet and explore their new-found freedom and independence. ...read more.

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