Allocation of country’s resources according to price mechanism: Allocation of country’s resources according to price mechanism means considering the sectors as most potential sectors in which the demand is increasing rapidly and allocating the country’s total resource on the basis of growth in demand. This process needs a long term analysis of previous market demand and relative supply.

Free Market Economy: The term free market economy primarily means a system where the buyers and sellers are solely responsible for the choices they make. It is the opposite of a controlled market, in which the state directly regulates how goods, services and labor may be used, priced, or distributed, rather than relying on the mechanism of private ownership. These prices, in turn, are fixed by the forces of supply and demand of a respective commodity. In cases of demand falling short of the supply of a respective commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or service. Free market economy is also characterized by free trade without any tariffs or subsidies imposed by the government.

Advantages of Free Market Economy: There are many advantages to a free market economy. They range from the moral issues to the practical issues. We will deal mainly with the practical ones.

The growth sectors will need a huge amount of labor force while developing. So a wide range of employment will be created and the man power of the country will be efficiently occupied.

Buyers are free to buy any commodity which they like and in whatever amounts. The producer can also produce whichever product they want to and also increase the capacity of any individual commodity depending upon the forces of the market. Producers are free to undertake the risks and rewards associated with increase in production. There is no state intervention in the functioning of the forces of the market.

With the increase of production in industrial or agricultural sector the country’s GDP will increase, as GDP is the market value of all goods and services produced in a year in a country. It will draw a positive effect on the country’s economic growth.

The biggest advantage that a market-oriented economy enjoys is the determination of a unique price determined by the demand and supply in absence of any monopolistic or oligopolistic influences. The decision of what to produce, for whom to produce and in what quantities is taken by the market forces and not determined by the state.

Though the resources are always scarce, by allocating resource on basis of price mechanism we can make the best use of available resource. The growth sectors will receive more investment so proper allocation of money will be ensured. Thus the utility of money and other resource can also be maximized.

Disadvantages of Free Market Economy:

If the potential sectors do not grow according to expectation, the total income of the country in a year will also not reach the expected level. In this situation, there may be a big deviation between the actual tax collected and the government predicted to get as its income.

Because the free market is a quasi-mirror of nature, those who are stupid, lazy, or just tragically unlucky are often relegated to poverty and misery. To redress this, it is necessary to create institutions outside of, or in addition to, the market so that the least valuable people do not become so poor and desperate that they drag down the rest of society.

A market economy promotes trust and openness, which leaves a society possessing it venerable to enemies who wish to take advantage of that society’s good will. it is the responsibility of the government to be watchful against such subversion even when the general public is not.

With a market economy and the freedom of choice it brings, people are able to make choices that are harmful to themselves. When parents do not teach their children to make intelligent choices, the total level of moral and physical disease, and vice in general will increase in a society. Each person can be their own worst enemy, and in a market economy, every citizen must be on guard against personal foolishness and irrationality, if they do not want to suffer the negative consequences of wrong action.

(B)

Planed Economy: Planned economy or command economy is an economic system in which the state directs the economy. It is an economic system in which the central government controls industry such that it makes major decisions regarding the production and distribution of goods and services. Its most extensive form is referred to as a command economy, centrally planned economy, or command and control economy. In such economies, central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output. Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives. Planned economies are in contrast to unplanned economies, for example, the market economy, where production, distribution, pricing, and investment decisions are made by the private owners of the factories of production based upon their individual interests rather than upon a macroeconomic plan. They are many advantages and disadvantages of planned economy are given below: