The economic system is an assimilation of systems where the society aims at meeting the needs and wants of individuals. The system acquires needs through effective production of services and goods and this is determined by different supply factors of production. Such factors include labor, capital, natural resources and land. Due to scarcity of resources, the government has a difficult task of resource allocation between different factors.
While doing the same, the government has to put in consideration opportunity costs related to decisions based on manufacturing of different products or offering different services in an economic system as opposed to others. This paper will therefore focus on different ways in which, economic systems distribute and ensure effective use of scarce resources. Additionally, the essay will compare and contrast various economies.
Different economic systems are used by different nations. Free enterprise economy, command economy, transitional economy, mixed economy, public and private sector initiatives as well as private finance initiatives are some of the economic systems used by different nations. Free market economies also use price mechanism.
Market prices vary a great deal and with change based on underlying factor. This enables consumers and producers to adjust to new prices being adopted. In this type of economic system, the reason behind price change does not matter. What matters is whether the prices have decreased or increased. For example, use of tin is aimed at illustrating the effect of free market economy.
It is also believed that if people notice price change in an economy, they are more likely to react by economizing tin use. They do not actually care about increased prices and it doesn’t matter to them whether the change is as a result of decrease or increase in supply. Every individual in free market economy is also motivated by personal interest.
Consumers are highly encouraged to maximize on welfare while organizations are encouraged to maximize on profits. Private individuals on the other hand aim at maximizing wages, interests and profit. Additionally, firms have permission to sell anything they consider fit. They are also allowed to respond to clients in the way they want.
Similarly, consumers are allowed to purchase all they need from the producers. Competition in such a market is also high because producers compete for consumers while clients compete with each other for offers and grants provided in the market. However, in a mixed market economic, there are resources owned by private establishments and the others are possessed by the government. The government also allocates public resources such as health care, education and scientific research among others. Additionally, a mixed economy provides an opportunity for the government to correct failures in an economy using governmental interventions.
The latter thrifts are free and respond to pricing mechanisms in many cases. Hong Kong, Germany and the United States are some of the examples of countries with mixed economies.
In a command economy conversely, the government decides resource allocation and distribution. It also determines what is to be produced in a given economy. The government also decides the amount of labor that is to be paid and the amount spent in research and in production of goods. This type of economy nevertheless does not efficiently respond to actual market forces in theory and it sounds effective.
For example, there are different drains to effectiveness in this type of economy. First, plans made by government often depict goals as well as preferences of planners themselves and not individuals using resources and products. Secondly, many resources are wasted because not all individuals own them and the people responsible for their allocation do not have any incentives to put them into productive use.
Finally, there is limitation of choice. Many products bought by consumers are similar compared to free market economies. The latter reduces financial choices of consumers. The market indeed does not give consumers an opportunity to instruct the market and to provide the needed products. Compared to other economies, a transition economy is the one whose process is being transformed to free market from central planning.
It therefore, undergoes economy liberalization where market forces and not necessarily central planning organization set up the prices. Besides that, trade barriers are quite limited. There is also push to change resources and businesses owned by the government to private ones.
The finance sector enhances stabilization of private capital movement and macroeconomics. Transitional economy has therefore been applied in communist bloc countries including China, Europe and Former Soviet Union. Its process is additionally characterized by rapid change of companies and more specifically private ones.
Public private partnership can be a government or a private business venture operated by government partnership and private sector organization. It is a contract between public authority and private party. In this relevance, the private party offers a project and it takes the technical, operational or financial risk in the project. In other public-private partnership as a matter of act, individuals using the service bear the project’s expenses.
The taxpayer does not bear the cost and the government may provide grants and subsidies to the projects started with a purpose of offering public goods. A good example is the infrastructure sector where the subsidies are directed at attracting investors towards the project. The government may also offer support by breaking tax and eliminating annual revenues for a specific period of time.
Public finance initiative is also a means of introducing public private partnerships. This is achieving using public capital to fund public developments. The private sector also offers capital investments based on state contracts to other negotiated or agreed services. Unlike in the event of public private partnership, the government in such an economic system bears the cost of offering service partially or fully.
In conclusion, this paper has covered different types of economies. It has offered an explanation on how the private sector and the government use different economies to distribute resources equally to their clients. Additionally, the paper contrasted and compared different economic systems. Therefore, it is imperative for governments to carefully analyze any economic system before applying it exclusively in their countries. The countries on the other hand could choose to merge the economic systems that are deemed suitable for a specific country.
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