Market economies are free from government control, while command economies are planned by the government. Mixed economies, which are a combination of both, are the most common. In a market economy, supply and demand regulate production and prices, while in a command economy, the government controls production and prices. Most economies in the world are mixed.
The main difference between a market economy and a command economy is that a market economy is generally free from government control whereas a command economy is planned at virtually every stage by government forces. In a market economy, the levels and prices of production of goods and services are determined by the producers themselves on the basis of the demand for these goods and services. Conversely, things like production levels, prices, and even wages in a command economy, also known as a planned economy, are determined by government overseers. Most economies in the world actually possess characteristics of both types and are known as mixed economies.
There are two extremes that can determine how an economy develops. In a purely free market economy, that nation’s government would have no say in any aspect of the economy. The other extreme is a planned economy, which is controlled virtually without exception by the government. Almost all of the differences between a market economy and a command economy stem from this major divergence in philosophy.
Consumers and producers of goods have all the power in a purely free market economy. The laws of supply and demand will regulate how many goods are produced and what the prices of those goods will be. Competition between different firms helps ensure that no surpluses or shortages occur, as those firms will be financially motivated to maximize the impact of their output.
Conversely, a command economy is dictated by the wishes of government. The government will make the decisions about what goods are produced and who will have the ability to produce them. Those companies that have been singled out for production tariffs usually have to share their profits with the government, which also decides how goods will be allocated to each geographic region and what the prices will be.
There is rarely a market economy or a command economy in its purest form. China has long been considered a command economy, but in recent years it has taken steps to encourage entrepreneurship on behalf of its citizens. Also, there are many market economies that include some kind of government intervention. For example, a government in a market economy might implement programs to help the poor or make changes to economic mechanisms such as interest rates to stimulate stagnant growth. For these reasons, mixed economies are the predominant economic model in the world.
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