Microeconomics,, 16th Canadian Edition

(Sean Pound) #1

countries, but in most cases the initial few years were characterized by
significant declines in output and employment. Thirty years later,
however, most of the “transition” economies are experiencing growth
rates above the ones they had in their final years as centrally planned
economies. Living standards are on the rise.

The large-scale failure of central planning suggests the superiority of
decentralized markets over centrally planned ones as mechanisms for
allocating an economy’s scarce resources. Put another way, it
demonstrates the superiority of mixed economies with substantial
elements of market determination over fully planned command
economies. However, it does not demonstrate, as some observers have
asserted, the superiority of completely free-market economies over mixed

There is no guarantee that completely free markets will, on their own,
handle such urgent matters as controlling pollution, providing public
goods (like national defence), or preventing financial crises, such as
occurred in 2008 in most of the developed countries. Indeed, as we will
see in later chapters, much economic theory is devoted to explaining why
free markets often fail to do these things. Mixed economies, with
significant elements of government intervention, are needed to do these

Furthermore, acceptance of the free market over central planning does
not provide an excuse to ignore a country’s pressing social issues.
Acceptance of the benefits of the free market still leaves plenty of scope to

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