4. What are the different economic systems? An economic system refers to the way in which an economy decides what to produce, how to produce it and for whom. There are three main types of economic systems. They differ in terms of how much involvement the public and private sectors have in allocating economic resources.
Centrally Planned Economy
Mixed Economy Free Market Economy
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Centrally planned economy In a centrally planned economy, most economic decisions about what to produce, how and for whom are taken by the public sector organisations. In this economy, there are few private sector businesses and very little consumer choice.
Case Study Centrally Planned Economies
China and Russia (when it was part of the Soviet Union) once had large, centrally planned economies. Goods and services were produced by public sector organisations that had monopoly power and no competition. As a result, these organisations were often very inefficient at producing goods and services. Quality standards were poor and shortages of consumer goods were very common.
Advantages of centrally planned economies: Public interest The government can provide goods and services that it considers to be in the public interest, such as public transport, education and health care.
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Disadvantages of centrally planned economies: Government chooses, not customers Only the goods that the government wants people to have are produced. These may not necessarily be what people themselves want. Inefficient monopolies
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Public sector monopolies can be very inefficient with little incentive to produce the right goods efficiently or for the right people.
