Discuss whether the transition of an economy from one that is centrally planned to one in which resources are allocated through the free market is likely to be of overall benefit to the citizens of that economy.

[12 marks]

(Step 1: Define free market and centrally planned economy)



The economic system is the term used to describe the means or allocative mechanism by which its people, businesses and government make choices. A transition economy is an economy which is changing from a centrally planned economy to a market economy. In a planned economy, the government controls the factor of production and makes all key decisions about their use and distribution of income. In the planned economy, the government has a central role in all decisions that are made. On the other hand, the free market economy is an economy where all economic decisions are taken by individual households and firms and with no government intervention. In a free-market economy, decisions on how resources are to be allocated are usually taken by the price mechanism. The price mechanism determines the production, utilization of resources, and pricing

Transition economies undergo a set of structural transformations intended to develop market-based institutions. To make the shift from a command economy to a free market economy requires privatisation of state-owned industries, removal of price controls and removal of tariff barriers.



(Step 2: Discuss the benefits to the citizens of an economy transitioning from a centrally planned economy to the free market)



There are several benefits to the citizens of an economy transitioning from a centrally planned economy to the free market.

(1) 📈 Competition between firms in a free market economy will keep prices down.

In a centrally planned economy, there is no system of prices, or if prices are set arbitrarily by the state, planning is likely to involve the inefficient use of resources. In a free market economy the profit motive encourages producers to be more efficient. Competition between firms keeps prices down and acts as an incentive to firms to become more efficient. The more efficiently firms can combine their factors of production, the more profit they will make.

(2) 📈There will be greater economic freedom.

Complete state control over resource allocation would involve a considerable loss of individual liberty. As the state plans all production decisions, individuals do not have economic freedom to choose from competing goods and services. Workers would have no choice where to work. In the free market, individuals can choose which goods and services to purchase and which career to pursue, without being restricted by government regulations.

(3) 📈 There will be a wider choice of goods.

It is argued that planned economies cannot detect consumer preferences resulting in shortages and surpluses . As the state plans all production decisions, individuals do nor have economic freedom to choose from competing goods and services. They also Jack career choices, as the government allocates jobs based on production schedules and long-term plans for the economy. In the free market, decisions about what to produce are made by the people who will actually consume the goods. Firms will produce whatever consumers are prepared to buy for there are no restrictions on what they can produce. Thus there will be a much larger choice of goods and services in a free market economy compared to a planned economy.

(4) 📈Innovation will be promoted.

As resources, jobs, goods and services are determined (planned) by the government, there is a lack of incentive to be innovative. For example, the lack of competition or the absence of a profit motive for firms means there is less of an incentive to produce more goods and services or to produce these at a higher quality. The lack of incentives can therefore limit the standard of living for people in command economics. Innovation is promoted in the free market because it provides a competitive edge. Consumers can thus benefit from a variety of innovative products, at competitive prices and of high quality.

(5) 📈 There will be less bureaucracy.

The centrally planned economy involves administrative costs. The more wide-reaching and detailed the intervention, the greater the number of people and material resources that will be involved. These resources may be used wastefully. There is no need for costly and complex bureaucracies to coordinate economic decisions in the free market.




(Step 3: Discuss the disadvantages to the citizens of an economy transitioning from a centrally planned economy to the free market)



Moving towards a market economy can also have downsides.

(1) 📈There are several issues associated with transition.

The restructuring of the economy and the moves to privatise former state-run activities are accompanied with substantial job losses and the need for social reform. It is also essential for there to be a more robust tax regime in place, not least to fund government spending and service the external debt that has had to occur to fund transition. It is by no means a short and trouble-free process.

(2) 📈Merit goods will be under-produced and demerit goods will be over-produced in a free market system.

A merit good is defined as a good that is better for a person than the person who may consume the good realises. Merit goods, such as health and education, tend to be under provided in a free market. Demerit goods are those products that are worse for the individual consumer than the individual realises. Cigarettes for example. Due to information failure, demerit goods tend to be overproduced and overconsumed.

(3) 📈The absence of government control means the provision of public goods such as streetlighting, public roads and national defence may not be provided.

Public goods are non-excludable: once the good has been provided for one consumer, stopping all other consumers from benefitting from the good is impossible. Public goods are non-rival. As more and more people consume the good, the benefit to those already consuming the product will not be diminished. Streetlights for example.

(4) 📈 Income disparity a major problem associated with a free market economy.

A planned economic system enables basic needs to be met for everyone in society. For example, everyone in society has access to education, health care and employment. By contrast, in capitalist (free -market) economies, production is geared disproportionately towards those with high incomes and wealth.




(Step 4: Conclude)



To conclude, transition of a planned to a free market system over all brings higher benefits for it improves resource allocation that results in a higher growth and prosperity with a greater freedom for individuals. So overall, transition to a free market is expected to improve resource allocation.




>MARKING SCHEME <

Up to 8 marks for Analysis
• For analysis of the way in which resources are allocated in a centrally planned economy with due reference to the problems of resource allocation that arise in such an economy. (Up to 4 marks)
• For analysis of the way in which resources are allocated in a free market with due reference to the problems of resource allocation that arise in such an economy. (Up to 4 marks)
• For evaluative comment and a reasoned conclusion on the ‘overall benefit’ (4 marks)