Contd.

• 3.It allows for competition thus better services: Due to lack of competition,
some State Owned Enterprises fail to provide quality services. The infusion
of the private sector leads to competition. For example in Ghana the
coming into being of broadcasting stations like TV 3,Metro,Net 2 etc has
compelled GTV to offer better services.
•
• 4.Cost of living can be brought under control hence improved standard of
living: Since the aim of government is to maximize the welfare of citizens,
prices of goods and services of State Owned Enterprises are usually lower.
This lowers cost of living and improve standard of living of citizens. It must
,however, be mentioned that the participation of the private sector
guarantees consumer sovereignty since there will be freedom of choice
which will improve living standards for those who can afford such services.
 COMMAND ECONOMY
Definition
This is the type of economic system, where the means of production are owned and
controlled by the government or the state. As a result decisions as to what to produce, how
to produce and how to distribute are taken by government. This originated from Russia.

FEATURES OF A COMMAND ECONOMY

1. State ownership of property: This means that productive economic resources namely land,
capital and entrepreneurship or enterprises are owned solely by the state.
2. Allocation of resources through state planning: In centrally planned economy, the questions
of what to produce, how to produce, how to attain full employment among others are based
on the decisions made by the central planning committee
• 1. State ownership of property: This means that productive economic
resources namely land, capital and entrepreneurship or enterprises
Features
are owned solelycontd.
by the state.
• 2. Allocation of resources through state planning: In centrally planned
economy, the questions of what to produce, how to produce, how to
attain full employment among others are based on the decisions
made by the central planning committee
Contd.
• 3. People’s Interest: The main goal of government is to maximize the
welfare of the citizens. Prices of goods and services are therefore
lower than under the free market economy where the motive for
production is to profiteer.
•
• 4. State Intervention: The state being an entrepreneur and owner of
all productive resources can intervene to regulate prices in all
enterprises. Any economic activity must fall within the confines of
state regulations or laws.
 Merits of Command Economy

• 1.Greater Equality in Income Distribution:

The aim of government under this economy is to maximize the welfare of citizens.
Since the resources or factors of production except labour are owned by the state,
it is not likely for anyone to derive incomes from hiring out land or capital for any
extra income. More importantly, distribution of income is managed by the central
authority thus fairness in the distribution of incomes may be guaranteed.
• 2.Provision of vital goods and services:
Certain goods and services which need large capital accumulation and are regarded
as very essential such as maintenance of law and order (police service); defence,
roads, hospitals, schools etc. may not be provided by private individuals because of
capital constraint. Government is however in the position to correct this anomaly
by virtue of being the owner of all resources except labour.
Contd
• 3.People’s Interest: Production of goods and services under socialist
economy is not meant for profit making but to maximize the welfare
of the people. The prices of goods and services are, therefore, lower
under command economy than capitalist economies where the
motive for production is profit making.
•
• 4.It allocates resources efficiently: The planning committees under
socially planned economy make sure that the goods produced are the
essential ones needed by consumers. This helps to reduce waste in
resource utilization.
•
 Demerits of Command Economy
• .It is costly to operate:
• The success of socialist or planned economy requires the employment of
qualified officials who will estimate wants and direct factors of production to
produce them. Once all these officers are paid, it will lead to increase in
expenditure hence increased operating cost. It also needs to be emphasized that
the setting up of the distribution agencies will also increase cost.
•
• 2.Lost of consumer sovereignty:
• The consumer cannot be assured that the goods and services that will be
produced will reflect their wants. This is because the decision as to what to
produce lies in the hands of the central government. More importantly
preference is given to basic needs of people which are also standardized relative
to luxuries.
Contd.
• 3.Bureaucracy or delays in decision making:
• Decision making is delayed under state planning because the question as
to what to produce, how to distribute, how to produce etc. goes through
various stages. The needs of people should be assessed and documented
in districts and regions. This involves extensive paper work which delays
decision making.
•
• 4.Lack of competition and inefficiency in production:
• Since the state assumes the role of an entrepreneur as well as a
monopolistic position in the production of goods land services, there is the
absence of competition which in consequence may lead to inefficiency in
production.
MIXED ECONOMY
• Definition

• Under this economy, decisions as to what to produce, how to

produce, how to distribute etc are made by both the government and
private individuals. This is because factors of production are owned
partly by private individuals and partly by the government. Ghana and
Nigeria are examples.
Features
• 1. Resource ownership: Productive resources namely land, labour
and enterprise are owned partly by private individuals and partly by
the state. This means that the state is not solely responsible for
production and investment. In Ghana, Ghana Broadcasting
Corporation, Ghana Railway Corporation, Ghana Post, Ghana Ports
and Harbour Authority etc are few examples of State Owned
Enterprises. Some of the Private-Owned Enterprises include
Intercontinental bank, Shell Ghana Limited, Prudential Bank etc.
• 2. Price Determination: Prices are determined mainly by the forces
of demand and supply but some prices are administratively
determined. For example in Ghana prices of utilities and petroleum
are regulated by the state.
Contd.
• 3. Employment: Employment is not the sole responsibility of the state. In
fact in Ghana although the government is the major employer of labour;
the private sector is gradually accounting for a large proportion of
employment. This is manifested in the continual proliferation of small scale
businesses throughout the country especially in Accra and other urban
areas.
•
• 4. Method of production or How to produce: The decision with regards
to how to produce is not dictated by the state. The method of production is
dependent on the factors or inputs considered to be less expensive by
either the private sector or the state.
•
• 5. State Intervention to correct Income Inequality: To breach the income
gap between the rich and the poor, the state may intervene through the
imposition of taxes and subsidies as policy tools for redistribution of
income between the rich and the poor. Progressive tax may be used to take
more income tax from the rich and the proceeds used to provide welfare
services needed by the poor especially in the remote areas in the form of
pipe-borne water, schools among others.
•
• 6. Where to produce is not centrally determined. Private individuals are
free to set up business ventures or enterprises within enclaves of their
choice
•
 IMPORTANCE OF MIXED ECONOMY
• 1.Efficient allocation of resources:
• The fusion of the private and public sectors will ensure efficiency in the allocation of
resources. Since the aim of the private entrepreneur is to maximize profit, resources are
allocated efficiently based on the output prices.Concious of the fact that the success or
failure of the business means their success or failure, resources are utilized efficiently. In
addition, the state faced with the problem of scarcity usually set up planning committees
to ensure that goods produced are the essential ones.
•
• 2.It controls exploitative tendencies of a monopoly: Due to state intervention prevalent
under mixed economy, the desire on the part of a private entrepreneur especially a
monopolist to exploit consumers through the creation of artificial shortages to increase
price exorbitantly can be controlled. Government can institute price control e.g. maximum
price legislation. In addition, government may directly produce such goods to control
prices.
•
 Contd.
• 5.It creates employment opportunities: With the inability of government to
employ the increasing numbers that are poured out into the world of work from
the school system due to capital constraint, the private sector may provide the
additional capital required to set up the needed enterprises to absorb the
unemployed and provide more employment avenues. This will also assist to
minimize the rate of social vices.
•
• 6.Private sector business profit can be taxed for additional revenue:
• Most State Owned Enterprises fail to make meaningful profits due to certain
negative attitudes to work. They rely heavily on government subventions. The
infusion of the private sector usually eliminates such problems where such
negative attitudes are minimal thus more profits can be generated. Such profits
can be taxed for additional revenue needed for government’s developmental
(roads, rails, dams etc) and recurrent expenditure (wages/salaries, interest
payment of debts) programmes.
Contd
• 7.Transfer of improved technology: Foreign private investment brings
in improved technology. Improved technology refers to new improved
methods of production or new improved ways of doing things. This
may be transferred to workers and local entrepreneurs. The effect is
that general productivity will increase and standard of living will
improve.
BASIC FUNCTIONS OF EVERY ECONOMIC
SYSTEM
• 1. What to produce: Since to the economist resources are scarce relative to
demand, the need to decide on what to produce is essential so that resources will
be utilized efficiently by producing goods that consumers are willing and able to
buy in order to avoid waste.
• Relative output prices determined by the forces of demand and supply
direct producers as to what to produce. Other things being equal, commodities
with relatively higher prices and, therefore, promising higher profits are produced
under the free market economy. Under the socialist economy investment or
production is taken by the government by allocating the scarce resources to
provide the essential needs of the people. The goal of government is to maximize
the welfare of the citizens thus price is not the inducing factor for production
under the socialist economy. Prices are administratively determined e.g. in Ghana
prices of utilities are determined by the state. It, however, needs emphasizing
that Ghana practices mixed economy and thus combines both the socialist and
capitalist economy.
Contd.
• 2. How to produce or production method: Another important function is
the method of production to use in order to minimize cost and maximize
profits. In view of this, an economic system may be organized along the line
of labour or capital intensive based on relative cost.
• Under the free market economy, relative input prices help to
determine how to produce. The relative input prices also influence
government in determining the method of production. Thus the lower the
price of the inputs or the factors of production, the greater the probability
of its usage in the production process since cost of production will decline
hence profits will be maximized. Under the socialist, welfare maximization
is the goal thus the method of production selected should focus on welfare
of the populace.Probably, in view of the serious unemployment problem in
West Africa, labour intensive form of production is recommended
Contd.
• 3. How much to produce: Due to scarcity, countries cannot use their
limited resources to produce surplus goods which are not needed
immediately. It is, therefore, expedient that economic systems must
be able to determine the reasonable amount of goods to be produced
to satisfy human wants. In a market economy, with the aim of
maximizing profits, producers will produce up to the level where
profit is maximized.
• How to distribute : Relative output prices influence distribution.
Consumers with higher money vote and thus capable of paying higher
prices are able to win the hearts of producers to have commodities
being distributed to them. The state under the socialist economy
normally set up distribution centers in the districts and regions of the
country to supervise distribution. Rationing may also be employed in
the distribution process.
•
• 5. How to achieve full employment: Full employment defies a single
definition. In a country like America;3% unemployment is considered as full
employment.Theoritically,one can only talk about full employment when
there is no idle productive resources i.e. all resources including labour have
been employed. In market economies this is ensured by managing demand.
The higher the demand, all other things being equal, the higher the level of
employment because it induces production. With expansion in production
more factors of production including labour can be absorbed. In centrally
planned economies, full employment is attained through planning.
Government development plans are drawn to match resources with the
available needs of the people.
•
Contd.
• 6. How to achieve economic growth and development: Economic growth
is defined as sustained growth in the per capita income in the face of
growing population or as a result of increase in productivity during a given
period of time. With increase in productivity standard of living will also
improve thus development in the lives of the people.
• In the market economy, profit motives induce producers to allocate
resources to produce goods needed by consumers based on their money
vote i.e. output price. Thus production and economic growth is facilitated
through profits gained which is usually influenced by the output price.
• The socialist economy relies on fiscal and monetary policies such as
taxes, interest rate etc to induce demand and encourage investment to
facilitate economic growth and development.
•