An economic system is the set of institutions and mechanisms a society uses to decide what, how, and for whom to produce.
Traditional System
Behaviour based on tradition, customs, and habits. Property held in common. What, how, and for whom to produce are determined by what happened in the past. Works better in unchanging environments.
For example: communities in the Canadian Arctic.
Command System
Also known as a centrally planned economy. A central authority makes most economic decisions and sets prices. The state owns major industries. Limited consumer choice and minimal competition.
For example: North Korea.
Pure Market System
Also known as free market or capitalism. Individual decisions of consumers and firms collectively allocate resources through unhindered markets. The state only provides legal structure and external defense. Production is driven by consumer demand and profit; goods go to those who can afford them.
Examples:
- 19th-century United States (approx. 1870–1900)
- Hong Kong (pre-1997)
Mixed System
Combines elements of all three. Both markets and government affect resource allocation and income distribution. Government enforces ownership and contract law, maintains monetary stability, corrects market failures, provides merit goods such as free health and education, and redistributes income. In practice every economy is mixed.
Examples:
- United States (modern)
- United Kingdom
- Sweden
- Singapore
Market Failure
A situation where the free market does not work well, such as over-exploited natural resources, under-provided public goods, or externalities imposed on society by the private sector.
Examples:
- Air pollution from factories (negative externality)
- Overfishing in international waters (tragedy of the commons)
- Under-provision of national defence (public good)
- Traffic congestion (common resource)
- Asymmetric information in used-car markets (market for lemons)
Worked Examples
Features of Capitalism
Which of the following is not a feature of capitalism?
- Centralized planning
- Self-interest among households and entrepreneurs
- A price system based on demand and supply
- Freedom of enterprise
Solution Reveal Hide
Centralized planning is not a feature of capitalism. It is a feature of a command system.
Identifying a Mixed Economy
Veridia has a traditional rural sector and a market-driven urban sector. Identify its economic system and the likely effect on income distribution.
Solution Reveal Hide
Veridia combines traditional and market elements, so it is a mixed economy.
Incomes in the urban market sector are typically higher than in the rural traditional sector, so significant income disparities are likely.
