Free Market Economy vs Command Economy: Difference and Comparison

Factors such as supply and demand by the sellers and buyers play an important role in an economy such as a free-market economy, but this sometimes leads to misbalance and gap between the rich and poor, considering there is more demand by the rich or certain products and they can afford them too and vice versa.

There are different types of economy, such as the command economy, to fix this gap by focusing on a social cause.

Key Takeaways

1. In a free market economy, the government plays a minimal role, and individuals and businesses decide what to produce and how much to charge. In a command economy, the government controls all economic activity.
2. In a free market economy, prices are determined by supply and demand, while in a command economy, prices are set by the government.
3. In a free market economy, competition among businesses drives innovation and efficiency. In contrast, the government makes all decisions in a command economy, leading to inefficiencies and a lack of innovation.

Free Market Economy vs Command Economy 

The difference between the free market economy and the command economy is the factors that control it. Whereas the seller and buyers control pricing and all other factors in a free market economy without any interference from the government, the command economy is fully controlled by the government without any interference of any other external factors.

In a Free Market economy, sellers and buyers play a major role in price determination and other major decisions such as investment and production. It is left alone from any government regulations.

This type of market targets earning and maximizing profit. This type doesn’t follow business ethics strictly.

Command Economy is where demand and supply don’t play any role, but the government or the central authority controls the economy. The decision regarding investment and production is taken by the government only.

This type of economy’s main aim or motive is social welfare and fulfilling macroeconomic objectives.

Comparison Table

Parameters of Comparison	Free Market Economy	Command Economy
Definition	The Market where sellers and buyers determined the price.	The Market is fully controlled by the government.
Government Regulation	No or very less government regulation.	Fully regulated by the government.
Natural Resources	There are more misuses of natural resources.	No misuse of natural resources.
Development	This type encourages innovation and development.	This however does not encourage such development.
Ethics	Poor business ethics	High business ethics

What is Free Market Economy?

A Free Market economy is where there is no involvement of the government, and all the prices are determined by the demand and supply, i.e., by the sellers and the buyers.

Features

1. This is the economy that individuals or private companies privately own.
2. There is the presence of financial institutions which help individuals by lending resources and later gain profits by charging interests.
3. There is freedom and democracy of participation; anyone can produce how much they want in this type of economy.

Advantages

1. Consumer demand and choice are given priority. Only goods are produced which are preferred by the consumers.
2. The absence of government interference results in more innovations, and producers do not have to take permission before making any changes or developing by being more innovative.
3. There is more competition in this economy, resulting in better quality in production.
4. More demand ultimately results in higher profits for the suppliers or producers.
5. Resources are allocated in a good manner, as producers bear any cost for the quality of raw materials.

Disadvantages

1. There is a high chance of exploitation of humans and natural resources without government interference.
2. Their main motive is profit earning which sometimes results in using inferior quality of raw materials to save costs/expenses.

What is Command Economy?

Command Economy is the type where the government determines and controls everything.

Features

1. It is considered an economic plan set by the central authorities.
2. Government plays a major role. Everything is under the control of the central authority, from allocating resources to deciding prices.
3. Certain laws and amendments are followed to make sure resources are distributed equally.
4. There is no domestic competition, but it is a monopoly of the government.

Advantages

1. This leads to social development; quality of life is improved as the main focus is the betterment of society.
2. In this type of economy, the least amount of natural resources is exploited as the government keeps a check on every activity.
3. This leads to filling the gap between rich and poor and makes people come above the BPL.
4. The government ensures there is no or less unemployment in this type of economy by providing them with employment.

Disadvantages

1. Demand is not given preferences; hence production is done as decided by the government, not the consumer.
2. There is no innovation development in this type of economy.
3. Central authority takes more time to strategize things and make decisions, which further results in awful decision-making and terrible strategies.

Main Differences Between Free Market Economy and Command Economy

1. Factors of demand and supply play a major role in deciding and determining the decisions in the Free Market economy, but only government plays a role in deciding and making decisions in a command economy.
2. There is no or minimum government regulation included in the free market economy as the government regulations control the command economy are implied.
3. The main motive of the free market economy is profit earning and maximizing, but the main motive of the Command Economy is the social and economic welfare of the country.
4. Consumer preference plays an important role in the free market economy as it is given priority, but in a Command Economy, consumer preference is not taken into consideration. Every decision is taken by the government.
5. Resources are not distributed equally, creating a gap between rich and poor in the free market economy, whereas resources are distributed equally, terminating any such gaps.
6. There is a constant endeavor for more innovation development in the free market economy, but no such development and innovation take place in the command economy.

References

1. https://www.jstor.org/stable/41653738
2. https://www.jstor.org/stable/41653738
3. https://link.springer.com/chapter/10.1007/978-1-349-20863-0_8

Last Updated : 14 October, 2023