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Difference Between Free Market Economy and Command Economy

In any economy, the existence and functionality of an economic system are of great importance. This takes care of the economic questions regarding;

  • The type of goods that should be produced
  • How the goods should be produced
  • Who should produce the goods

An economic system must also take into consideration the rights of the consumers, producers and government laws. However, major economic decisions may be made by the government or by the individuals, leading to free, market, command or mixed economies. 

 

What is Free Market Economy?

This is a market system whereby the pricing of goods and services is primarily determined by the sellers and buyers, and is hence based on demand and supply. In this economy, there exist minor to none government regulation. Both sellers agree based on the equilibrium on the pricing. 

Free market economies have various advantages

  • There is consumer sovereignty as producers produce mainly what consumers want, which gives consumers greater choices for their purchases.
  • Due to the absence of government regulation, there is a reduction in costs, more innovation through research and development as developers do not have to await authorization from the government. They are hence able to study demand and meet the customer’s needs. 
  • Better quality of products through competition among producers.
  • High profits for goods in demand.
  • It creates a better allocation of resources in the market since producers are willing to pay more in order to acquire quality raw materials. 

Free Market Economies, however, has various disadvantages

  • Since the major motivation is high profits, firms may end up reducing costs through unlawful measures such as employee exploitation and environmental pollution.
  • Failure to prioritize on low profit products and services may in return cause problems in the communities.
  • Since the prices are not regulated, it can lead to unhealthy competition whereby large firms may lower prices hence exploiting small firms.
  • It may lead to unemployment due to the discrimination of the disabled and elderly persons.

 

What is Command Economy?

This is an economy whereby the market system is fully controlled by the government. The government hence controls the pricing of goods and services, quality, distribution channels, quantity of output and even the producers, in some sectors. 

A command economy has the following characteristics;

  1. A central economic plan set out by the government.
  2. Allocation of resources by the government according to the central plan.
  3. Production laws including price controls and quotas are set out in the central plan. The goal is to ensure equal distribution of resources including food, shelter and food to its citizens, while also setting out national priorities. 
  4. Monopoly ownership of the businesses by the government in sectors such as utilities, finance and automotive is set. This enhances zero domestic competition. 
  5. Laws, directives and regulations are created to enhance the central plan. 

The advantages of a command economy include;

  • Since society’s interests are a priority, people’s lives are improved through employment creation and resource utilization
  • Since the government is in control, the manipulation of natural resources is easier without facing environmental regulation issues and lawsuits

The disadvantages of a command economy include;

  • The production of goods is not always as per demand
  • It discourages innovation 
  • Society’s needs may be ignored due to poor strategizing

 

Similarities between Free Market Economy and Command Economy

  • Both economies have similar economic players including consumers and producers, services and goods and money and labor. 
  • The aim of both is the production of goods and services as per market demand

 

Differences between Free Market Economy and Command Economy

  1. Definition

A free market economy is a market system whereby the pricing of goods and services is primarily determined by the sellers and buyers, and is hence based on demand and supply. On the other hand, a command economy is an economy whereby the market system is fully controlled by the government.

  1. Government regulation

While a free market economy is regulated by the producers and consumers and there exist minor to none government regulation, a command economy is regulated by the government. 

  1. Objective

The objective of a free market economy is the maximization of profits. On the other hand, a command economy focuses on social as well as macroeconomic objectives. 

  1. Consumer preferences

In a free market economy, consumers’ preferences are taken into consideration. On the other hand, the consumers’ preferences are not taken into consideration in a command economy as the government decides the item and amount of production. 

  1. Innovation and economic development

While the free market economy encourages innovation and development, the command economy does not encourage innovation and development. 

  1. Business ethics 

A free market economy creates unhealthy competition leading to poor business ethics. This in turn leads to unemployment and inequality.  On the other hand, the government is able to control the mode in which business is carried out in a command economy hence reducing unhealthy business practices as well as unemployment. 

  1. Resource distribution

There is unequal resource distribution in a free market economy hence a wide gap between the rich and the poor. On the other hand, a command economy enhances equal distribution of resources hence a small gap between the rich and the poor. 

  1. Preservation of natural resources

The drive to earn higher profits in a free market economy can lead to the misuse of natural resources. With a command economy, however, the government is able to control overuse of natural resources. 

Free Market Economy vs. Command Economy: Comparison Table

 

Free Market Economy vs. Command Economy: Comparison Table

While a free market economy is a market system whereby the pricing of goods and services is primarily determined by the sellers and buyers, and is hence based on demand and supply, a command economy is an economy whereby the market system is fully controlled by the government. It is important to note that what may work for one nation may not work for another.  Although most nations follow a mix of the two, it is essential to understand the pros and cons of each system before putting it in use. 

 

Tabitha Njogu

Tabitha graduated from Jomo Kenyatta University of Agriculture and Technology with a Bachelor’s Degree in Commerce, whereby she specialized in Finance. She has had the pleasure of working with various organizations and garnered expertise in business management, business administration, accounting, finance operations, and digital marketing.

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References :


[0]Vidler C & Grant S. Economics in Context. Heinemann Publishers, 2000.  https://books.google.co.ke/books?id=qhOJNjAJp50C&pg=PA19&dq=Difference+between+Free+Market+Economy+and+Command+Economy&hl=en&sa=X&ved=0ahUKEwju5ra43_LhAhUFQhoKHRqIDuoQ6AEILjAB#v=onepage&q=Difference%20between%20Free%20Market%20Economy%20and%20Command%20Economy&f=false

[1]Orr Tamra. Understanding Economic Systems- Real World Economics. The Rosen Publishing Group, Inc, 2011. https://books.google.co.ke/books?id=liV3eAK0As0C&printsec=frontcover&dq=Difference+between+Free+Market+Economy+and+Command+Economy&hl=en&sa=X&ved=0ahUKEwjB2YHJ3_LhAhXIxoUKHb7KC1g4ChDoAQhSMAg#v=onepage&q=Difference%20between%20Free%20Market%20Economy%20and%20Command%20Economy&f=false

[2]Economics, Volume 2. Pearson Education India, 1922.  https://books.google.co.ke/books?id=eSrDB3F3W7gC&pg=PP282&dq=Difference+between+Free+Market+Economy+and+Command+Economy&hl=en&sa=X&ved=0ahUKEwjB2YHJ3_LhAhXIxoUKHb7KC1g4ChDoAQhGMAY#v=onepage&q=Difference%20between%20Free%20Market%20Economy%20and%20Command%20Economy&f=false

[3]Image credit: https://commons.wikimedia.org/wiki/File:Economic_Systems_Typology_(v4).jpg

[4]Image credit: https://commons.wikimedia.org/wiki/File:Fundamentals_of_Business_-_Fig._2.2_-_Economic_Systems.jpg

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