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What are the disadvanteges and advantages of a command economy and a market economy?
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12-19-2012, 04:26 AM
Post: #3
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OK market economies have been covered. What are the advantages to a planned economy?
Primarily it is in ensuring Pareto efficiency where the market fails. This comes down to negative and positive externalities. A negative externality is a where an effect of the production and/or consumption of a product is felt by a party not involved in the production or consumption and this impact is negative. For an example we eat sausage but do not live near the sausage factory that gives off a terrible smell. I engage in a contract to purchase the amount of sausage where marginal benefit to me is equal to marginal cost being charged. But the person living next to the sausage factory is suffering from the smell. That is he is experiencing a "cost" as well. I do not take his cost into account. Equally so an externality can be positive - ie a benefit can be felt by a third party. For instance if I buy health insurance I can see a doctor and get better more quickly. Hence I can get back to work more quickly. This is of benefit to me, but also to my employer who has a more reliable productive workforce as a result. I do not take into account the benefit gained by my employer in getting health insurance when I decide to do so. Both of these examples therefore result in a pareto inefficient outcome. But in a planned economy, theoretically the production of both sausages and health insurance will take into account all benefits and costs. In practice we have seen market economies limit market freedom (through anti trust laws, regulation, taxes and subsidies) to deal with this. Equally we have seen central planners in command economies fail to take into account costs and benefits, and indeed wieght thier own costs and benefits more highly in decision making. |
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What are the disadvanteges and advantages of a command economy and a market economy? - soccerboy_1243 - 12-19-2012, 04:18 AM
[] - Sageandscholar - 12-19-2012 04:26 AM
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