In the twentieth century, there have been primarily two competing economic systems that provided answers to the questions of what to provide and for whom, given limited resources: “command economies” directed by a centralized government and “market economies” based on private enterprise. History has proven that, worldwide, the central command-economy model has not sustained economic process and has not provided long-term economic security for its citizens.
Private Enterprise
In fact, many government-controlled economies are turning to privatization to improve incentives and efficiency. Privatization is that the selling of government-owned businesses to non-public investors. This trend has provided a chance for U.S. firms to have businesses in foreign countries that previously prohibited U.S. investment. Why is that this trend appearing? we are going to take a glance at the four differing kinds of market structures that are currently identified within the private enterprise system.
The private enterprise system, or economic system, is centered on the economic theory/belief/philosophy of capitalism and competition.
Capitalism is an national economy within which businesses are rewarded for meeting the wants and demands of consumers. It allows for personal ownership of all businesses. Entrepreneurs, aiming to earn a profit, create businesses that they believe will serve the wants of the consumers.
Capitalist countries offer foreign firms opportunities to compete without excessive trade barriers.
As a results of the ineffectiveness of command economies, governments tend to favor the hands-off attitude toward controlling business ownership, profits, and resource allocations that go together with capitalism and market economies with competition regulating economic life and creating opportunities and challenges that companies must handle to succeed.
A Taxonomy of Competition. There are four differing kinds of competition during a private enterprise system: pure competition, monopolistic competition, oligopolies, and monopolies.
Pure competition could be a market or industry during which there are many competitors. it’s easy to enter the market, as there are few barriers to entry and lots of people/organizations are able to offer products that are similar to one another. in an exceedingly market where there’s pure competition, a lower price becomes the key factor and leads buyers to prefer one seller over another, and there’s likely to be little differentiation between products. Additionally, the number that every individual seller can offer constitutes such alittle proportion that when acting alone it is powerless to affect the worth. Therefore, individual firms in these commodity-like markets have little or no control over the worth.
Monopolistic competition implies that there are fewer competitors, but there’s still competition. during this market environment, it is somewhat difficult to enter the market. The barriers to entry could be due to location, access to commodities, technology, or capital investment levels. The result’s that there are usually differences in products offered by competing firms; perhaps they serve the identical function, but there are differentiations that depend upon consumer preferences to make a choice. thanks to the differentiation factor, individual firms are ready to have some style of control over the costs. They can choose to charge a premium or a reduction to line their product apart and affect the demand.
Oligopoly may be a market situation with few competitors. The few competitors exist thanks to high barriers to entry, and some large sellers vie for, and collectively account for, a comparatively large market share.
The products or services during this market could also be similar (telephone companies) or they’ll vary (supermarkets). within the oligopolistic market situation, the individual firms do have some control over prices (Whole Foods Market can charge more for produce/products than Albertsons) and may create differentiation or vie for more of the market share by having price be a part of their consumer acquisition strategy.
Unlike the parlor game, a monopoly exists within the private enterprise system when there’s absolutely no other competition. That means that there’s just one provider that exists to supply an honest or service. during this case, it’s often the govt. that regulates who can enter the market, so there are not any specific barriers to entry. But the govt regulations make sure that there are not any competing products or services within the market. the shortage of competition yields considerable power over prices in a very pure, or unregulated, monopoly, but there’s little control over prices during a regulated monopoly. An example of a pure monopoly is that the issuance of a patent for a drug, within the case of a pharmaceutical company. Some pharmaceutical drugs haven’t any current substitute, in which case the patent holder company encompasses a monopoly within the production/distribution of that drug. during this case the government guarantees that no other company can produce the drug, and that provides a sufficient market entry barrier. Monopolies of this sort, however, arise rarely because pharmaceutical drugs may have substitutes and therefore the regulatory barriers to entry are typically temporary (for a period of some years).
Planned Economies
In addition to the private enterprise system, planned economies are another market structure within the world economy. during a planned economy, government controls determine business ownership, profits, and resource allocation. Countries that existed with planned economies, however, haven’t been highly successful.
The most common theory of a planned economy is communism, which purports that every one property is shared equally by the people in an exceedingly community under the direction of a powerful central government. It is an economic system that involves public ownership of companies. Rather than entrepreneurs, the govt. decides what products consumers will be offered and in what quantities. because the central planner, the govt establishes trade policies that historically are very restrictive in allowing foreign companies the chance to compete.
Communism was proposed by philosopher and developed and implemented by V. I. Lenin. In Marxist theory, “communism” denotes the ultimate stage of human historical development within which the people rule both politically and economically.
The communist philosophy is predicated on each individual contributing to the nation’s overall economic success and therefore the country’s resources are distributed in keeping with each person’s needs. The central government owns the means of production and everybody works for state-owned enterprises. Further, the govt. determines what people should buy because it dictates what’s produced.
Looking specifically at China and Russia, we are able to see what led to the failure of communism. First of all, their constitutions had little or no meaning, so although the govt created laws, they bore no power. Second, the govt. owned the means of production and made all of the economic decisions. Therefore, economic process weren’t allowed to figure, and therefore the laws of supply and demand weren’t followed.
Third, the citizens of those countries had limited rights and every one the citizens were subject to political party control. Individuals existed to serve the state and had virtually no freedom for themselves. All of these factors contributed to the downfall of communism and as a result, China and Russia are currently privatizing and borrowing other capitalistic methods in a trial to enhance their economic situations and convert to a more market-based economy. they’re desperately trying to urge the market to search out an equilibrium for his or her goods and services that we only too often deem granted.
Socialism
Another financial system is socialism, which is characterized by government ownership and operation of major industries. as an example, when telecommunications, gasoline, or another major industry is owned by the govt, this is often considered a socialistic economy. Socialism is an national economy that contains some features of both capitalism and communism. Socialist governments allow people to possess businesses and property and to pick their own jobs. However, these governments are involved in providing a range of public services, such as generous unemployment benefits, comprehensive health care for all citizens, and transportation. These public services are got by high tax rates on income. Entrepreneurs, not surprisingly, have less incentive to establish businesses if the tax rates are excessively high.
Socialism is predicated on the assumption that major industries are too important to a society to be left privately hands; however, private ownership is allowed in industries considered to be less crucial to social welfare.
As socialism is retreating, there are new theories of regulation emerging. The new theories aren’t about to regulate economic relations between individuals, as socialism did, but rather they seek to manage social relations generally. for instance, there’s a desire to extend the “social capital” in communities. If “social capital” is defined as norms and networks that encourage cooperation and trust between individuals, then the existence of social capital may be beneficial.
It reduces transaction costs, assists the diffusion of data, and can enhance the sense of community well-being. The questions arising now, however, are whether the govt can create social capital and, even more fundamental, if the govt. should create social capital. Although the standard variety of socialism is not any longer touted as a successful market structure, remnants of it can still be seen in today’s economy.
The majority of market economies that we see today, however, are mixed market economies. These are economic systems that display characteristics of both planned and market economies. In the mixed economy, government-owned firms frequently operate alongside private enterprises. Good samples of this will be found in Europe where the respective governments have traditionally controlled certain key industries like railroads, banking, and telecommunications. what’s seen today, however, could be a trend toward privatizing many of those state-owned industries. In 1986 the
United Kingdom privatized the gas industry, in 1987 it privatized the industry, and in 1989 water was privatized. Today, Austria is following suit and is proceeding with the privatization of steel, oil, and chemicals.
