Revision ●
Introductory concepts
government involvement in the economy. Even system. Government involvement is deemed
in the seemingly free economies, such as the essential, since there are some dangers that will
USA, the UK, or even Hong Kong, government exist if the free market is left to operate without
intervention is very much a part of the economic interference.
Disadvantages of a free market economy Disadvantages of a planned economy
De-merit goods (things that are bad for people, such as drugs Total production, investment, trade and consumption, in
or child prostitution) will be overprovided, driven by high even a small economy, are too complicated to plan efficiently
prices and thus a high profit motive. and there will be misallocation of resources, shortages and
surpluses.
Merit goods (things that are good for people, such as As there is no price system in operation, resources will not be
education or health care) will be underprovided, since they used efficiently. Arbitrary decisions will not be able to make
will only be produced for those who can afford them and not the best use of resources.
for all.
Resources may be used up too quickly and the environment Incentives tend to be distorted. Workers with guaranteed
may be damaged by pollution, as firms seek to make high employment and managers who gain no share of profits are
profits and to minimize costs. difficult to motivate. Output and /or quality will suffer.
Some members of society will not be able to look after The dominance of the government may lead to a loss of
themselves, such as orphans, the sick, and the long-term personal liberty and freedom of choice.
unemployed, and will not survive.
Large firms may grow and dominate industries, leading to Governments may not share the same aims as the majority
high prices, a loss of efficiency and excessive power. of the population and yet, by power, may implement plans
that are not popular or are even corrupt.
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