The advantages of a free market economy (and the disadvantages of
command economies)
1. Efficiency. Free market economies are very competitive. Most of their
industries are assumed to be perfectly competitive, and so they will use their
resources wisely and efficiently to make them more profitable. Ultimate
decisions about what to produce are made by the people who will actually
consume the goods. Planners in a command economy are less likely to make
the correct decisions across the whole economy.
2. Choice. Industries and businesses will produce whatever consumers are
prepared to buy. Remember that the consumer is the sovereign, or has the
final say. There are no other restrictions on what the firms can produce. It is
of no surprise, therefore, that there will be a much larger choice of goods and
services in a free market economy compared with a command economy. The
planner in a command economy will be more concerned with making sure
there are enough essential goods to go around rather than allocating
resources efficiently between all goods.
3. Innovation. Industries and businesses will always be looking to produce
something new to get ahead of their competitors. Even though the
government's role is very limited, one of its jobs is to protect the people’s
rights to own property. This will include intellectual property rights through
patents, or legal documents that give ownership to an idea to a person or
group. Hence, there are incentives, or rewards, in the free market system for
firms to be innovative and produce better quality products. Obviously there is
no incentive for the planner in a command economy to be innovative. As long
as they produce the essentials, the planners will be happy.
4. Higher economic growth rates. History has demonstrated that economies
with more market characteristics have higher growth rates and a generally
wealthier population. The United States, one of the freer market economies
in the world, is also the largest economy. In comparison, China’s economic
growth rate was far slower when it was more of a command economy than
what it is today as more of a mixed economy.
The advantages of a command economy (and the disadvantages of a market
economy)
1. Strong, universal “safety net.” A command economy might not have
enough incentives for the successful to make millions, but at least the strong
government will try to make sure that everyone has their basic needs met. It
will be a fairer economy, even though it is likely to be less successful overall.
For many, the unequal distribution of income and large gap between rich and
poor is the big disadvantage of a free market economy. In a free market with
very limited government, benefits tend to be low, the health service poor, and
schools under-funded. If you start life with very little, and do not even get a
good education, then there will be very difficult to escape poverty.
2. Quick decisions. Though it has a limited role, any government decision in a
free market will take a long time, as the consumers’ and the producers’ often
differing concerns must be considered. In a command economy, decisions
are made by central planners in order to maximize group benefit. If there is a
housing shortage, government planners can order more to be built
immediately. In a market economy, if there is no incentive (other than
allowing more people to have shelter), producers might not respond to the
apparent need right away or at all.
3. Regulation of negative actions. A true free market economy will essentially
lack any rules. Producers will be free to produce any goods imagineable
(including things that can be harmful to humans or society, such as drugs),
treat and pay workers however they please (assuming consumers don’t
mind), and cause considerable damage to the environment (again, assuming
it doesn’t bother consumers). Without incentives to prevent negative actions,
individuals and/or groups can possibly make decisions that can harm or take
advantage of others or the environment. More government control, which
exists in a command economy, would attempt to prevent these actions by
establishing firm rules and consequences for their violation.
4. Social services. If individuals in a market economy can’t afford healthcare,
education, or even basic services such as water or electricity, then they go
without them. This can problematic, obviously. In a command economy, all
services are guaranteed and produced by the central planners. Individuals
would not need to consider how to pay for hospital visits, schooling (at any
level), or other services.
Adapted from: http://www.s-cool.co.uk/a-level/economics/free-market-vcommand-economies/revise-it/which-system-is-best