The advantages of a free market economy are that resources are allocated through supply and demand, meaning there is not as much wastage as in a planned economy as decisions are not taken so far in advance and as a result the economy as a whole is less susceptible to adverse purchasing trends. The lack of government influence also means there is much more freedom and things which the government may not have seen as essential are available to the consumers. The effects of competition which are not prevalent in a planned economy result in a price motive, meaning there is an incentive for companies to reduce their prices if it results in increased sales.
The disadvantages of the market economy are the often very serious effects of market failure this when the market either does not provide or is unable to supply goods or services in which there are no profit incentives, such as education, healthcare etc. and there is an overproduce of demerit goods such as tobacco and alcohol. Another disadvantage of the system is that the prices of goods only take into account the private costs to the producer and do not include social costs or impacts, something which may be more closely examined under a planned economy. The lack of governmental power makes the economy unregulated and it is prone to booms and slumps for which there is no protection.
A planned economy is one in which all resources are owned and allocated by the state, this is known a public enterprise. All key economic decisions are undertaken by the government, as is the distribution of wealth. In such an economy, factors such as profit incentives or price mechanisms are not allowed to determine what is produced and how it is produced. Production is said to be for use rather than for profit. The planners in this economy must first decide upon the production potential of the state and then must decide how best to allocate resources to maximise this potential. Anything, which is produced, is done so for the state and all income is shared among the population.
The advantages of a planned economy are that resources are allocated with the benefit of the state in mind rather than individual consumers. This means the population has a fair share of the country’s resources. There are fewer inequalities in a planned system due to restrictions imposed by government upon private ownership and the heavy taxation of the rich to provide benefits for the poor. Governmental interventions also reduce both the risks and effects of huge inflation or unemployment.
The disadvantages of a planned economy are the reduced level of enterprise brought about by the lack of incentives as well as a lack of competition. Economic decisions being made in advance can result in huge surpluses or shortages if state planners under or over estimate the demand for certain goods or services. There is also a certain amount of bureaucracy, which slows down all of the decision making processes and therefore makes the economy slower to react to a change in demand.
It would be almost impossible for a completely free market or planned economy to work and none exist in the world today. The closest to being totally planned would be North Korea, but even there industries such as logging have commercial interests involved in them. All economies in the world are a mix of free market and planned. The advantages of a mixed economy are that private sector control of public goods means production is controlled by the price mechanism and profit incentives ensure that the allocation of resources meets the consumer’s desires. Public sector control of public goods such as education and health prevents market failure in these areas and governmental control helps to curb inflation, and unemployment as well as ensuring growth.
Privatisation in the 1980s moved Britain closer to being a free market economy than a planned one, but the mix between the two is still fairly equal. Many privatisations have been a success, such as British Telecom, British Gas, and have provided the same service as a nationalised company whilst remaining competitive. However, others such as the privatisation of the UK’s rail network have no been so successful and many people yearn for a return to state control. Personally, I feel that the mix between market and planned economies in the UK is about right, although there are some services such as the aforementioned rail network which I believe may be better run in the hands of the government. On the other hand, if privatisation reduces taxes and enable the government to concentrate on more essential services such as health and education, then privatisation may be the way forward.
