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Types of Economic Systems with Explanation

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Economic system’s type is determined by how scarce resources are distributed within an economy. There are various types of economies throughout the whole world. Though these economic systems are unique, they share some common characteristics. These economic systems can be categorized into four types:

Types of Economic Systems

  1. Traditional Economic System
  2. Command Economic System
  3. Market Economic System
  4. Mixed Economic System

Each of the types is discussed in details below:

Traditional Economic System:

The traditional economic system is the most ancient and traditional among the types of economies over the whole world. This economic system has some elements which are more prominent in the newer economies like Mixed.

The products and services produced in the traditional economic system are the direct outcome of their norms, beliefs, values, customs, religions, traditions, etc. A major portion of the world is still following the traditional economic system. Those are mainly rural areas in second or third world countries where people depend on farming. A small portion of the nomadic people also follow the traditional economic system, but they follow other economies while selling, trading or bartering goods or services.

A remarkable advantage is that custom and tradition are preserved under a traditional economic system which virtually doesn’t exist in mixed or market economies. Again, a traditional economy ensures a more pronounced and specified role for each member of society. So, these societies are sometimes very socially satisfied.

Traditional economies cannot generate the kind of surplus or profit that a mixed or a market economy can generate. Generally, you can rarely a surplus in a traditional economy. An indigenous or a third world country usually does not possess the necessary resources and if there is any surplus that is wasted, distributed or paid to the authority who is in power.

The major disadvantage of this economic system is that there is a lacking of centralized utilities, modern medicines, technology, etc. which other economies enjoy vastly.

Command Economic System

The command economic system is known as the next step in economic advancement. It does not mean that it is fairer than the traditional economy. This economic system has many things which are fundamentally wrong.

The most mentionable characteristic of this economic system is that a centralized power or sometimes a federal government controls a major part of the economy. The command economy usually develops in a country which possesses a very huge portion of the valuable resources. The government or central power then takes charge of regulating the resources. Sometimes, even the government owns everything engaged in the process of industrialization whether equipment or the facilities.

The command economy can overtime start unrest among the general public. But this economic system can provide different potential advantages if and only if the government regulates everything intelligently. A command economic system can create a sufficient supply of its resources and the people within the economy can get the resources at affordable prices. But ultimately, the government regulates the resources and prices them. Still, more or less, the people have sufficient jobs because the government regulates in a similar way to a market economy and it wants to grow upon the population. 

The most interesting part of the command economy is that the government almost always has the desire of controlling the most vital resources. Other sectors, such as agriculture and the like, are regulated by the public. Many of the communist governments follow this economic system.

It is difficult for the central power to meet everyone’s need. So, the government is forced to ration because it is unable to calculate demand while setting prices. This economic system lacks innovation, as no one needs to take a risk and sometimes even the government decides which jobs are suitable for the people.

Market Economic System

The market economy and the free market are quite similar. The valuable resources, vital goods or other important sectors of the economy are not controlled by the government. The people within the economy run the organizations, thus the way of running the economy, generation of supplies, necessary demands and other things are determined.

Truly, there is no totally free market economy throughout the world. As for example, America, by nature is a capitalist country, but our country is not. The government of our country still controls or tries to control fair trade, monopolies, moral business, government programs, etc. Capitalism has an advantage that the economy is relatively safe and well controlled. In socialism, similar to a command economy, the most vital and profitable industries are owned and controlled by the government but the remaining parts of the market are operated freely, i.e. price fluctuates with supply and demand.

In the market economy, the government is separated from the market which doesn’t let the government become too powerful and the government’s interests are aligned with the interests of the market. Hong Kong is a good example of a free market economy.

Under this economic system, the entrepreneurs have lots of incentive because the highest price is paid by the consumers according to their wants. And only those goods and services are produced which are profitable. So, the production’s factors are used most efficiently and the business environment is very competitive. There is a lot of scope for innovation because businesses spend more on research and development and they compete with one another for providing the best products for customers.

In a market economy, because of the fierce competition, businesses have no concern for the disadvantaged such as the disabled or elderly. As a result, there is a higher inequality in income. Self-interest drives the market. Human and social needs are overshadowed by economic needs. Monopolies may also exploit consumers.

Mixed Economic System

The dual economy is another name of the mixed economic system because primarily it is a mixture of a command and market economy. Actually, a mixed economy doesn’t have any specific definition, but mostly the term describes a market economy with a strict regulatory power and the control of the government in particular areas such as public goods and/or services. Sometimes, the government also interferes in the regulation process of private businesses. The mixed economy has evolved by incorporating the best policies of capitalist and socialist approaches. Most of the countries follow the mixed economic system. France and India are examples of mixed economies.

In a mixed economy, government intervention is less than in a command economy. So, private businesses operate more efficiently. Government intervention can correct the failures of the market. As for example, most of the governments will try to break any large company in case they abuse their monopoly power. Imposing taxes on harmful products such as cigarettes to reduce their consumption can also be an example. The government can reduce inequality and redistribute income by using taxation policies. The government can also produce social security or healthcare net programs for safety.

The disadvantage of this economic system is that government intervention is sometimes too much and sometimes not enough. Under the mixed economy, a usual problem with the state-owned industries is that they are often government-subsidized and go under large debts because of being uncompetitive in nature.


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