Market Economy Compared to Planned Economy in Terms

Last Updated: 27 Mar 2020
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Market economy compared to planned economy in terms of allocating scarce resources By: Habab Mohamed In the purpose of allocating the resources of a certain country, controlling the market flow, adjusting and making the rules and policies to manage the market in addition to the pricing of goods in terms of maintaining an efficient economy growth of a certain country, economists have been struggling to answer the very questioning issue; what is the most effective economy system in terms of allocating scarce resources?

Market economy or planned economy. In the debate of which is more effective in terms of allocating scarce resources, since in the two last decades the planned economies have introduced elements of the market mechanism into their economic system, the following paragraphs will briefly define the classifications of economy systems, determine the advantages and disadvantages of Market economy and compare it to the planned economy in terms of allocating scarce resources.

Market economy as economists define it, is the economy system in which the country’s economic decisions and all the assumption of market forces such as demand, supply and pricing of goods are the best determinant of what is good for the nation and the country as well. Governments in Market system have a little intervention or central planning, only to the extent that it’s needed to provide stability. All resources in Market economy are owned by people or firms, as a result they only and alone decide what to produce, how much they produce and to what market.

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When profit is the only and alone reason and motives for all business, demand and supply of goods and services play the main role as a pricing mechanism, which gives the consumer the freedom to choose within a variety of products. People in Market economy countries improve their technical skills and get more knowledge in their professions according to the high competition environment, trying to make more profit or at least trying not to lose their jobs if not developing their careers.

This competition environment not only motives people and firms to produce high quality goods or services at the least price in order to take place in the market, but also leads to having more innovations since producers always try to find a new product or to develop an existing one in order to get more profit, also a variety of goods and services are available in a market economy country for the producers to satisfy all the tastes of the consumers, what is directly resulting in the economy growth and the development of the country.

As world works out with the opportunities for hard workers to gain money, and for companies to make more profit as long as they can develop their business, foreign investment as a result refreshes the economy when more people and companies get attracted to a certain country. Even more, the power, cost and size of the government dealing with the different types of products or services are likely been saved when they are taken over by the private enterprises in the Market economy.

Businesses in countries that have market economy only provides job opportunities for people whom are productive, seeking only for more profit in addition to cutting cost by firing a lot of employees or decrease the labor force to the minimum, thus unemployment rate remains high as more machines and less labor will be used to cut cost. One of the disadvantages of Market economy is that people do not produce some kinds of goods since these goods or services are not profitable, for example; public goods and services such as street lighting.

Those services or goods which people want to use but don’t want to pay for, may not be available since the firms or people may not find it profitable to produce, governments have to manage producing such goods and services because they have to be done and people or firms are usually not interested. In Market economy, people and firms might find it profitable producing whatever is in demand regardless the effect on the society, some product are very harmful for the society such as weapons and drugs, this kind of products if is demanded, in free market economy, many people or firms would find it an easy way to get profit and make good business.

In addition, the harm could also happen to the society in a different way, as well as in Market economy the prices are free and producers decide in which price they want to sell their products or services, they negatively affect the society, the rich get richer and the poor get poorer. In free market economies, most of the production processes operate through the price mechanism. Market prices might be changed due to underlying conditions changes, consumers as well as producers adjust accordingly to the new ealities. They might not care so much about the reason why the change in price has taken place, they only care about if it has gone up or down. For example, if consumers notice the price of sugar rising, they will immediately respond by economizing on their use of sugar. None of them will care about the reason why the price of sugar rose, whether its supply is decreasing or its demand is increasing.

On the other hand, in planned economy, the government decisions drive most of the aspects of a certain country’s economic activities. Government in Planned economy totally control the allocation of the scarce resources, it determines everything from distribution to pricing, while the private enterprises are been alleviated accordingly. Governments in Planned economy have been given a dictatorship control over the resources of the country.

The two major drains of the efficiency of planned economy are; the first problem is that the dictions of the planners, government, doesn’t reflect the consumers’ tastes but the tastes of the government planners, there won’t be a variety of products, whether they are goods or services, since the consumers do not participate in the dictions making comparing to the market economy which gives the end users the opportunity to choose by offering a number of variety products in the market.

Another problem is that the scarce resources get wasted since individuals has no right to own any, the chance of allocating the resources to the most productive uses gets at the least point, compared to the free market economy, the scarce resources could be owned by individuals or private sector, since it’s the best owner to develop a good business out of it and get back with benefits to the country’s economy growth.

Planned economy can provide stability by controlling the prices, but it limits the growth of the country’s economy and the development since governments in planned economy does not allocate the scarce resources to the innovative minds.

Recently, planned economies have introduced some free market economy’s mechanisms into their economy system, such as giving shares to private companies or individuals in a certain public probable business, converting planned economy almost to a mixed economy system, this fact clearly shows that free market economy is better than planned economy in terms of allocating scarce, since the whole global economy is now turning into market economy. Thank you

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Market Economy Compared to Planned Economy in Terms. (2017, Jan 21). Retrieved from

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