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How in principle do a) market economies and b) planned economies solve the economic problem? Discuss the practical limitations of both systems by reference to the experience of european economies since 1980.

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Introduction

How in principle do a) market economies and b) planned economies solve the economic problem? Discuss the practical limitations of both systems by reference to the experience of european economies since 1980. "Any society faces what economists regard as the basic economic problem - it's citizens would like to have more goods and services than can be made with the available resources. So that choices have to be made about what is to be produced, including how it is to be done and who is to receive the goods and services when they are available. {Lythe C. The European mosaic (2000) P.221} This Quotation sums up the economic problem of scarcity relative to human wants for goods and services. This means decisions must be made on how to allocate resources and distribute finished goods and services. The two extremes ways societies can organise their economies into are a) market economies and b) planned economies. This essay will look at how these economies in principle try to solve the economic problem and then discuss some of the practical limitations of both systems. Planned Economy On the other side of the spectrum is planned economies. Planned economies are normally part of socialist governments ideologies so the decision of who the finished goods should be distributed to is seen as the most important. These government s are striving for fairness in distribution. ...read more.

Middle

The monopolist can use it's power in the market to impose it's prices on consumers. This leads to society as a whole being worse off as the taking some of the lost consumer's surplus but not all of it. An example of this is when British Telecom offered limited edition prints. Only 500 were to be reproduced and the price was set at �25. This suggests that British Telecom felt that limiting the Quantity supplied to 500 was necessary to make �25 a viable price. {Lipsey R.G. and Chrystal K.M. (1999)} Market economies do not take third parties into consideration. When two people come together to trade: a price is bargained for neither party is concerned who or what has been affected by production. The producer wants to have the lowest costs of production to make the greatest profit and the consumer wants the lowest price so he can maximise his consumer surplus. However this may lead to adverse effects on third parties such as the environment. If a producer uses chemicals in production of his good he will want to dispose of the waste in the cheapest way possible to keep his costs down. This may mean dumping it in a river. The environmental effects of this may be catastrophic. Under a free market this would not be a consideration. An example of this is the use of chlouroflourocarbons (cfc's) ...read more.

Conclusion

In a market economy wages or the lack of them if you are sacked provide incentives to work hard. In a planned economy workers usually have complete job security. Although this is highly attractive it does not provide sufficient incentive to work hard and efficiently. The temptation to shirk is too great. "in the words of Timothy Garton Ash, who wrote eye witness chronicles of the development of eastern europe from 1980-1990, The social contract between the workers and the government in eastern countries was 'we pretend to work and you pretend to pay us' " {Lipsey R.G. and Chrystal K.M. Principles of Economics (1999) P.3} Conclusions As this essay has shown market economies and planned economies try to solve the economic problem in completely different ways. Market economies rely on private ownership, self interest and the interaction of producers and consumers. On the other hand planned economies rely on public ownership and a government making all the decisions regarding inputs, outputs, inventories, and distribution. Both Ideologies have serious drawbacks. The drawbacks of the planned economy were seen by "the dismal record of the soviet economy" with "chronic shortages.. severe inefficiency...and... black markets, bribery and corruption." { Johnston B. Information and the economic problem.(1985)}.Market economies fail in the sense that the distribution of resources is unfair. Monopolies can mess up the whole system by controlling a market. Also a market economy does not take third parties in to account. In practice most countries find that a mixed economy is the best option: market orientated with government intervention. ...read more.

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