Economic System

Economic System

·         Market

Market system is where the consumer determine the allocation of resources, they make preference through price mechanism, the higher the demand of a product the more they willing to pay for it, higher the price will encourage firms to produce it, here government intervention is very minimum, almost all land and capital are private owned enterprise, some firms like hotel may hire a large amount of labor or labor intensive but some firms like car factory are using more advanced machine to replace labor, it’s called capital intensive, they trying to achieve least  cost method of production, in a market economy  the consumer decide what to produce, so the producer produce what is demanded, and the firms will think how to produce it, capitally or labor intensive, and for whom, everyone or someone that can afford it, free market system have advantages, because of the responsiveness of the producer, consumer have sovereignty, and there are lots of choice to buy from a particular firms and who to work for, the profit and competition here will promote the efficiency, because each firms trying to achieve to lowest cost so they will gain the highest profit, the one that don’t response quickly may loss in profit but there is a limitation here, firms and consumer maybe only seek for their own benefits so the private benefit is higher than the social benefit and make social marginal cost is higher, firms may throw away their waste in the river to cut their production cost, and consumer may smoke anywhere and cause health problem to anyone near them, competition within firms can lead to monopoly, when a firms win the competition they may take control of the market, and firms will charge anything for what they produce and some goods or service is sometimes are very needed such as defense, these firms will impose price for the people who need it, but because some people can already afford it, and all people feel the effect of the goods or service it will cause a free rider problem, where they who don’t pay for something but feel the benefits also, the minimum government intervention also can lead to market failure because the allocation of resources is decided by the consumer, if the consumer demand many of demerit goods such as alcoholic liquor, it may cause market failure because of the minimum intervention, and make a negatives externalities for the society.

·         Planned economy

Is the opposite of market economy where the government decides the allocation for resources, the allocation is to improve the welfare of its citizen, they decide what to produce, how to produce it and for whom, these question can be answered by maintaining the welfare of the citizen, the government will see what the citizen need, is they necessary to be involved in the production process and of course it will for the citizen itself, the state almost own all the land and capital and also employs the worker, or called State owned enterprise, usually the government provide the people with housing, transportation at free or low cost, the government isn’t seek for profit but the welfare of its citizen, the advantage of this economy system is that the market is hard to caught in market failure situation, because the government directly interfere with the system so they able to control the market situation preventing problems that may exist due to the allocation of resources, they can prevent the domination of one firms that might cause other firms to be less demanded, because they can help these firms by giving subsidies or imposing bigger tax on the dominating firms, the disadvantage is the consumer doesn’t have their sovereignty anymore because the market aren’t responsive like in the free market system, and efficiency is not very big compared to free economic because the firms cannot change their price without the government permit.

·         Mixed Economy 

A system that combined from planned and market, some are state owned and some are private own, some prices are determined by market forces and supply are set by the government, the consumer and government influencing what to produce, it’s trying to take the advantage of the two market system, and trying to avoid its disadvantage, their advantages are the government will hold all the cost and benefits that comes from their decision, such as train if its benefit to the society is bigger than the cost it would be maintained by the gov. even it didn’t make profit, they also can encourage production of a product that has a great benefit than the consumer realize by granting subsidies, making economy equality where everyone wages are the same and providing training for them and providing maximum use of resources to allocating it efficiently, but still there is no guarantee that this will be better than the others, there are risk still exist in this system Market failure still can occur and sometimes government intervention can make situation worse