(Step 1: Define free market and centrally planned economy)



The economic system is the term used to describe the means or allocative mechanism by which its people, businesses and government make choices. A transition economy is an economy which is changing from a centrally planned economy to a market economy.

In a planned economy, the government controls the factor of production and makes all key decisions about their use and distribution of income. In the planned economy, the government has a central role in all decisions that are made. On the other hand, the free market economy is an economy where all economic decisions are taken by individual households and firms and with no government intervention. In a free-market economy, decisions on how resources are to be allocated are usually taken by the price mechanism. The price mechanism determines the production, utilization of resources, and pricing

Transition economies undergo a set of structural transformations intended to develop market-based institutions. To make the shift from a command economy to a free market economy requires privatisation of state-owned industries, removal of price controls and removal of tariff barriers.



(Step 2: Discuss the benefits to the citizens of an economy transitioning from a centrally planned economy to the free market)



There are several benefits to the citizens of an economy transitioning from a centrally planned economy to the free market.

(1) 📈 Competition between firms in a free market economy will keep prices down.

In a centrally planned economy, there is no system of prices, or if prices are set arbitrarily by the state, planning is likely to involve the inefficient use of resources. In a free market economy the profit motive encourages producers to be more efficient. Competition between firms keeps prices down and acts as an incentive to firms to become more efficient. The more efficiently firms can combine their factors of production, the more profit they will make.

(2) 📈There will be greater economic freedom.

Complete state control over resource allocation would involve a considerable loss of individual liberty. As the state plans all production decisions, individuals do not have economic freedom to choose from competing goods and services. Workers would have no choice where to work. In the free market, individuals can choose which goods and services to purchase and which career to pursue, without being restricted by government regulations.

(3) 📈 There will be a wider choice of goods.

It is argued that planned economies cannot detect consumer preferences resulting in shortages and surpluses . As the state plans all production decisions, individuals do nor have economic freedom to choose from competing goods and services. They also lack career choices, as the government allocates jobs based on production schedules and long-term plans for the economy. In the free market, decisions about what to produce are made by the people who will actually consume the goods. Firms will produce whatever consumers are prepared to buy for there are no restrictions on what they can produce. Thus there will be a much larger choice of goods and services in a free market economy compared to a planned economy.