Under the system of a centrally planned economy, only central government planners make economic decisions, and there is a lack of individual choice to influence the economy. Public ownership of factors of production allows the government to allocate resources, however they wish. Some centrally planned economies in previous times include China and Russia, but no such economy exists today.
Australia, like many other economies, is a mixed economy. There are market forces that influence demand and supply, but also government interventions to solve and reduce the effects of various economic problems. The government provides most basic health, education and welfare services, however most decisions are left to the market. Health care is provided in the form of Medicare, and free education is offered to all from kindergarten to Year 12. The government also acts as a provider for people such as pensioners, and allocate allowances to the disabled. Examples include Family Tax Benefit and Youth Allowance. These provisions by the government ensure that people can receive more resources, reduce spending in education and health, and thus use their money elsewhere and help circulate and increase economic prosperity.
The economy does not always run freely, competitively and in the best interest of the economy as a whole. Therefore the government must avoid monopoly in the economy and enable consumers the sovereignty that is necessary. There is substantial competition in key areas such as transport, telecommunications, electricity and gas. It is a highly open economy with very low barriers to trade and investment. National competition policies are placed in order to avoid oligopoly and producer sovereignty. An example of the Australian government trying to avoid monopoly and oligopoly within the economy is allowing consumers to choose their gas, lighting and electricity providers. This action by the government ensures consumer sovereignty.
Australia has a comprehensive economic policy framework, with a sound, stable and competitive institutional structure. It also has a system of very prudential regulations. APRA (Australian Prudential Regulation Authority) is the prudential regulator of banks, insurance companies, superannuation funds, credit unions, and building societies. They are concerned with the provision of efficiency and competitiveness in the Australian economy. Economic management is affected by decisions made through The Reserve Bank, and monitoring policies regarding unemployment and interest rates. APRA is accountable to the Commonwealth Parliament as well as the regulated industries. The government also intervenes by subsidising tariffs, and provides regulations to prevent exploitation. The ACCC (Australian Competition and Consumer Commission) is the body responsible for enhancing the welfare of Australians through the promotion of competition and fair-trading as well as provisions for consumer protection. Governments can legislate to ban products, which are deemed undesirable to ensure safety standards.
The government also intervenes in distribution of output (income) because the free market may not necessarily provide a socially fair distribution. There are two ways:
Transfer payments- income is distributed by taxing people on higher incomes and transferring the money to people who don’t contribute to the production process.
Progressive Income Tax- higher income earners pay proportionally more tax than low-income earners.
A market economy is subject to the fluctuations of the business cycle, therefore the government intervenes through implementation of macroeconomic (counter cyclical) policies. The Reserve Bank Australia (RBA) plays a large role in regulating the Australian economy. Its main function is monetary policy, where it tries to achieve low and stable inflation over the medium term. The RBA’s aims are to stabilise the currency, maintain full employment, and to maintain economic prosperity and welfare of the people.
Australia’s current government budget is in surplus with the current account deficit being largely the outcome of private sector transactions. The RBA has a powerful influence on interest rates, which affect economic activity via a number of mechanisms. They can affect savings and investment behaviour, the spending behaviour of households, the supply of credit, asset prices and the exchange rate, all of which affect the level of aggregate demand.
In conclusion the government leaves the market forces to its own will but the government will intervene and act as a provider, regulator and controller. Through policies created, the government can intervene to affect the operations of free market forces, in order to decrease the economic problem and increase economic prosperity in Australia.
Essay:Assess which type of economic system is most effective in allocating scarce resources?
Economic systems are organised sets of procedures used within communities or between communities to govern the production and distribution of goods and services. Economists identify three types of economic systems: traditional (customs, habits, laws, and religious beliefs control decisions), command (government regulates economic activity), and market (individuals control production and distribution resources and make decisions based on the market in which they function). A mixed economy combines elements of these systems.
All economies must answer three significant questions. What goods and services should be produced, how should they be produced and who gets the goods and services that are produced. The key point is who answers these questions in a country. In a command economy they are answered by the government, which means that the government decides upon everything. In a market economy they are answered by individuals and companies.
This concept also determines the major difference of the two economic systems which is who owns and controls the physical capital, in other words, who determines the allocation of resources. In a command economy as mentioned before this is entirely the role of the government and in a market economy this is done by private parties.
(In a mixed economy this role is, depending on the country, more or less equally divided between the government and private parties.)
Command economies can also be called centrally planned economies, as a country’s government, not being satisfied with the efficiency and/or fairness of allocating resources, has there decided to do all the planning itself.
This seems to be quite a good goal, as their aim is to allocate resources and distribute wealth equally and fairly where otherwise there would not be enough for everyone.
The government sets a target (a plan) of what should be produced in a certain period of time, in order to cover the basic needs of the people. They sometimes have to set prices to regulate and to control demand to be able to match the planned supply.
However command economies (or CPEs) do not consider human behaviour in consideration of the impossibility of satisfying demand. Also , with everyone being treated equally no matter how much one is working for the plan, the people are losing the interest in considering quality. A good example for that is the production of the Trabant (Trabbi, Car) in the GDR.
As said before, the market economy is the complete opposite of the command economy. It does not involve any form of planning. However there is no such thing as a pure market economy. Therefore there is no economy in the world that does not involve planning of any kind.
Most countries in the world today have the mixed market economy. Those are primarily countries with a heavy reliance upon the market as a resource allocator. Planning is here often used for the public sector, including defence, health care, education and transportation. A name for a certain extend of government intervention, only giving the rough direction for an economy is ‘indicative planning’. The role of the government is limited and the basic structure of the economy is taken as given. A mixed market economy involves competition.
The command economy system was and is usually used in socialist/communist societies to get scarcity of life essential goods to a minimum. Items are scarce when the supply of a good or service does not satisfy the demand. Scarcity exists because human wants for goods and services exceed the quantity of goods and services that can be produced using all available resources.
This definition proves that it is absolutely crucial in a society to find a way of allocating resources. It only remains to argue which way is the most efficient and the best for a country. All economic theories (and societies) have an explanation of how resources are allocated and therefore how production of goods and services are produced and consumed.
A pure market economy (that does not really exist) can well claim to be the probably most efficient allocating system, however it can not claim to be an equitable or fair rationing system.
Time has shown that a centrally planned or command economy usually does not succeed. A good example for that is the former Soviet Union.
Therefore the conclusion to the essay question is that a mixed market economy until now is the most efficient one in allocating scarce resources. It combines the advantages of a free market coming from the market economy with the advantages of social security and justice coming from the command economy. It is hard to say how big the role of the government should be but planning should always ensure the basic life essentials.
