A pure market economy is a theoretic free market system in which the government takes a completely neutral role. Its regulation of economic activities through laws does not limit, interfere with, or promote any party in the market, that is, laisses faire. As such, the individuals in the market, rather than the government, are the main decision makers and direct all activities. Additionally, these market players are not influenced by other parties such as industry regulators who have vested economic interests in the market. Such an economic system is, however, an extreme form and is not representative of actual developed markets despite concerted efforts to achieve such a state. On the other hand, a centrally planned economy is the exact opposite of a pure market. This economic system is exclusively managed by through government bureaucracy (Pettinger, 2016). The development of such a system depends on the administrative directives formulated by the government. Economic plans are strongly entwined with the will of the political class, often characteristic of socialist governments. Such a system requires obedience and discipline of citizens to the state, making them completely dependent on the government especially for goods and services.
Theory and Discussion
Pure Market Economy
As theoretical extremes, pure market economies only exist on paper. Economies produce goods and services depending on the wants and needs of individuals. As such, even pure economies deal, hypothetically, with the questions of how best to utilize the scarce resources to produce the most desired goods and services. Groups of individuals in the market determine who will use resources to produce goods and services. This is imperative since the government sets no employment or antidiscrimination laws (Moyher, 2017). Further, these same individuals decide the most satisfying goods and services to produce, at what quantity, and at what rate. No antimonopoly or antitrust restrictions are imposed on these activities nor does the government subsidize and production. These include laws criminalizing child labour, production of unsafe goods, or emission of toxic waste. Once goods are services are produced, their exchange is undertaken voluntarily. Buyers seek the lowest price while sellers seek the highest price (AmosWEB, 2018). Therefore, the highest bidders determine the equilibrium prices of goods and services. This exchange of goods and services is not subject to any form of taxes or legal restrictions such as minimum age limitations for accessing certain products. In terms of international trade, the government does not facilitate or restrict movement of goods in any way. Low or no tariffs or quotas are imposed on imports and exports so local markets are not protected from dumping. International trade primarily takes place between individuals who own capital
Centrally Planned Economy
This system of economy is also called a pure command economy. The government controls, owns, or directs the majority of resource allocation decisions as guided by a single plan. In dealing with scarcity and decisions for productions of goods and services, the predetermined plan is laid out in extensive detail on how to allocate every input factor, all intermediate goods, job specifications, labour, and even output. Theoretically, such allocation of every resource is well thought out and executed to avoid the possible problems of allocating precious resources in free markets. This may achieve efficiency at micro levels at is helps distribute scarce resources imperatively.
Price allocation is the responsibility of the government in planned economies. Prices of commodities are set and maintained through price interventions. Governments intervene in commodity pricing by setting minimum administrative prices below which market prices cannot fall (OECD, 2001). Additionally, maximum price levels are set in the same way to prevent spikes. Lastly, planned economies are protected through restrictive international trade laws to carefully regulate outflow of capital though import quotas and tariffs.
- AmosWEB (2018). Pure Market Economy. Available at: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=pure+market+economy
- Moyher, A. (2017). What is a pure market system of economics? Available at: https://bizfluent.com/facts-7383482-pure-market-system-economics-.html
- OECD (2001). OECD glossary of statistical terms—Intervention purchase definition. Available at: https://stats.oecd.org/glossary/detail.asp?ID=1411
- Pettinger, T. (2016). Central planned economy. Available at: https://www.economicshelp.org/blog/glossary/central-planning/