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Planned Economies

In the last few decades, planned economies around the world have succumbed to the challenge of the free market. Before analyzing why this has happened, we must understand the economic distinction between a free market economy and a planned economy. The free market, on the one hand, sings the siren song of self-regulation. If you allow companies to operate on their own, free market advocates maintain, unhindered competition will yield the highest level of efficiency while keeping prices at the optimal place. In the economistsÆ parlance, companies will set their prices where marginal cost equals marginal revenue. Free markets, however, break down when it comes to producing public goods, or goods that are indivisible and unexcludable (McConnell and Bruce 81-82). The most traditional example is that of a lighthouse. A lighthouse is beneficial for society, or economically justified, if its costs are less than its benefits. However, because it benefits all ships that pass by it, it is impossible to exclude a ship from using it and thus impossible to set and enforce a price on its use. Because the public good of the lighthouse cannot be priced and sold, it would be unprofitable for a business and thus would typically not arise in a strictly free market economy (Morrissey 1-3).

A planned economy, on the other hand, exists in theory to provide the optimum amounts of public good. By pooling resources, the government can provide the highest amount of average good for all citizens. However, planned economies must try to set prices on the cost curve by figuring out where average costs equal marginal revenue, they do not have the benefit of the legendary invisible hand of the market (McConnell and Bruce 81-82).

In the world today, centrally planned economies have been routed by the free market. All over the world, former communist countries have come to realize that incorporating free market principles into their economies is ...

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Planned Economies. (1969, December 31). In LotsofEssays.com. Retrieved 11:33, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1702400.html