Different types of economic systems

What Is an Economic System?

• Economic systems are the methods societies and
governments use to organize, allocate and distribute goods,
services and resources across locations.
• It serves as a regulatory system for controlling different
aspects of production and distribution, including capital,
labour, land and other physical resources.

Types of Economic Systems

• Each type of economic system has its own distinguishing
characteristics, although they all share some basic features.
• Each economy functions based on a unique set of conditions
and assumptions.

The main categories are as follows:

1 Traditional economic system
◦ This is based on goods, services, and work, all of which
follow certain established trends.
◦ It relies a lot on people, and there is very little division of
labour or specialization.
◦ In essence, the traditional economy is very basic and the
most ancient of the four types.
◦ It is commonly found in rural settings in second and third
world nations, where economic activities are
predominantly farming or other traditional income-
generating activities.
◦ Advantages
▪ Rarely any surplus in goods or resources
▪ Community members are generally more satisfied
in social roles
▪ Absence of total economic hierarchy results in a
lack of economic competition
◦ Drawbacks
▪ Antiquated methods of distribution
 ▪ Lack of growth and technology development
▪ Reliance on localized resources and services
inhibits globalization
▪ Less focus on industrialized production and more
focus on agricultural processes

2 Command economic system

◦ In command economic systems, governments and
centralized powers control much of the economic
processes, including allocating and distributing
resources, goods and services.
◦ Many command economies consist of governments that
have total control over the distribution and use of
valuable resources, like oil and gas.
◦ Additionally, these types of systems may operate under
governing entities that have ownership of essential
industries like transportation, utilities and energy, and
technology.
◦ Advantages
▪ Creates potential for mass mobilization of
necessary resources due to government control
▪ Creates additional jobs for community members
and citizens due to increased mobility of resources
▪ Focuses on benefits to society over individual
interests
▪ Encourages more efficient use of valuable
resources
◦ Disadvantages
▪ Creates scarcity due to an inability to plan for
individual needs
▪ Forces government rationing due to inability to
calculate demand on set prices
▪ Eliminates market competition, resulting in a lack of
innovation and advancement
▪ Inhibits employees’ freedom to pursue creative jobs
and careers
3 Centrally planned economic system
◦ In this, the society creates and dictates economic plans
to drive the production, investments and allocation of
goods, services and resources.
◦ The government only intervenes in production processes
to regulate fair trade agreements and ensure compliance
with international policy.
◦ Additionally, governments in a centrally planned
economy take part in coordination efforts to provide
public services.
◦ Advantages
▪ Better able to meet national and social objectives
by addressing issues like environmentalism and
anti-corruption
▪ Gives governing powers the ability to make
decisions regarding the production and distribution
of goods and resources when private industries
cannot raise enough investment capital
▪ Allows input from community members on
government plans for setting product prices,
determining production quantity and opening up job
sectors
◦ Disadvantages
▪ Can create a lack of government resources to
respond efficiently to shortages and surpluses
▪ Potential for corrupt actions within governing
bodies and established powers
▪ Creates a potential loss of freedom for citizens
wanting to start their own enterprises
▪ Institutes governing powers that sometimes
develop into repressive political systems

4 Market economic system

◦ In a market economic system, or a “free-market system”,
communities, firms and proprietors act in self-interest to
decide how to allocate and distribute resources, what to
produce and who to sell to.
◦ Governments in market systems typically have little
 intervention in how businesses operate and generate
income, however, can regulate factors like fair trade,
policy development and honest business operations.
◦ Advantages
▪ Provides incentive for innovative entrepreneurship
▪ Gives consumers a choice in goods, services and
purchase prices
▪ Creates market competition for resources, resulting
in quality offerings and efficient use of resources to
produce goods
▪ Inspires research, development and advances in
goods and production of goods
◦ Disadvantages
▪ Highly competitive markets can cause a scarcity in
resources for disadvantaged individuals
▪ Potential for monopolizing of industries and niches,
such as technology, health care and
pharmaceuticals
▪ Can increase income disparity by placing focus on
economic needs over societal, community and
human needs

5 Mixed economic system

◦ Mixed economic systems combine two or more
economic practices to form one central system.
◦ Traditionally, a mixed economy consists of a market and
command economy combined to form an economic
system where the market is generally free from
government or national ownership.
◦ However, the government can still have control over
essential industries and sectors like transportation and
defence
◦ Further, the governing entities in mixed economic
systems usually have a predominant oversight over the
regulation of private corporations and businesses.
◦ Advantages
▪ Allows for private companies to operate more
efficiently and reduce operational costs because of
 less government oversight
▪ Creates an outlet for market failures through
allowing certain government intervention
▪ Enables governments to create net programs like
social security, health care and food and nutrition
programs
▪ Gives governments power to redistribute income
through tax policies, reducing income disparities
◦ Disadvantages
▪ Government intervention can be too frequent or not
frequent enough, creating an imbalance
▪ Creates potential for government subsidiaries
within state-run industries
▪ Can cause subsidized government industries to go
into debt with a lack of competition in state-run
industries