Free Market Vs Planned Economy Essay

1311 words - 6 pages

Compare & contrast a market economy and a planned economy in terms of the following; provision of public goods, production and consumption of merit and demerit goods, consumer sovereignty and equity in income distribution. (30marks).

A market economy is an economic system where the factors of production, are privately owned, consumers and producers are motivated by self interest, the level of competition in the markets is very high and resources are allocated through the price mechanism. The definition is supported by Lipsey (1992) who also state that decisions about resources allocation are made without any central direction but instead as a result of innumerable ...view middle of the document...

However in a planned economy there is provision of such goods because the government makes all decisions on what is produced. Hall () mentioned that public goods cannot be provided privately because of their non diminishability and non –excludability that is consumers take a free ride since no one can be excluded from consuming them so it is almost impossible for a private firm to get anyone to pay for a public good. In a planned economy the state can finance the provision of public goods like defence and police service, by means of taxation and sometimes borrowing, local authorities provide street lighting and flood control can be provided by giving contracts to private sector firms.

Production and consumption of merit and demerit goods
According to Lipsey (1992), merit goods are those goods that the government compels or encourages people to consume, mainly because individuals are said to be unaware of the true benefits from consuming them. He also added that demerits goods are those goods which the state forbids people to consume mainly because individual are said to be unaware of the true harm they would suffer by consuming them. The best known examples of merit goods are health, education systems, insurance, inoculation and seat belts. The provision of merit goods in a free market economy tent to be under provided because spending on merit goods by the consumer would be determined by the private benefits derived from them. Like in United State of America where the free market is practised, the public health system compromised, people are advised to buy health insurance. The poor might not be able to afford this and some people might simply decide not to bother if they feel particularly health. In cases of seat belts consumers may fail to recognise their true private benefits hence less demand and less supply in a free economy. The demerit goods include cigarettes, alcohol and illegal drugs. These are over consumed in a market system because consumers may be unaware of the true cost of consuming them which includes negative externalities.
However in a planned economy there is an increase in the production and consumption of merit goods because the government considers them to be highly desirable for the welfare of the citizens. In this economic system the government has central authority to make decisions on the commodities to be produced hence emphasis will be placed on the production of merit goods and consumption of demerits will be reduced. The state can increase the production of merit goods by providing free state education and national health services. Contracts for services like refuse collection can be given to private sector firms. The government can also encourage the consumption of merit goods by providing information about the benefits of inoculation and passing legislation requiring vehicles to take and pass the vid tests. In the command economy production and consumption of demerit goods is reduced with the purpose of...

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