Difference between Free Market Economy and Command Economy

The existence of an economic system, as well as the way in which it functions, is of critical significance in any economy. This answers all of the issues that arose regarding the economy;

  • The categories of products that should be manufactured

  • How should the products themselves be manufactured?

  • Who should be responsible for producing the goods?

To function properly, an economic system is required to take into account not just the rights of consumers and producers but also the rules of the government. However, significant economic choices can be taken by either the government or by individuals, which can result in a free market economy, a command economy, a mixed economy, or a combination of the two.

What is Free Market Economy?

It is a market system in which the price of products and services is mostly established by the sellers and purchasers of such goods and services and is thus based on demand and supply. In this economy, the level of government regulation ranges from minimal to nonexistent. Both vendors have reached an agreement on the pricing based on the equilibrium.

There are several positive aspects associated with free market economies.

  • There is consumer sovereignty because manufacturers mainly create what customers want, which provides consumers more options for their purchases and so increases consumer sovereignty.

  • There is a reduction in expenses and an increase in creativity via research and development as a direct result of the absence of government regulation. This is because innovators do not have to wait for authorization from the government, which frees them from this requirement. They are able to investigate demand and fulfill the requirements of the customers as a result.

  • Increased levels of product quality as a result of increased levels of producer rivalry.

  • Profits are high for items that are in high demand.

  • As a result, there is a better distribution of resources on the market, which is caused by the fact that companies are ready to pay more for higher-quality raw materials.

Free Market Economies, however, have several downsides.

  • Due to the fact that big profits are the primary motivator, businesses could end up decreasing expenses by unethical means, such as the exploitation of their employees or the pollution of the environment.

  • It's possible that difficulties in the community might be caused by a failure to prioritize low-profit products and services.

  • Because prices are not controlled, this can result in unhealthy competition, in which large corporations may attempt to undercut smaller firms' pricing in order to gain an unfair advantage.

  • It is possible that handicapped and elderly people may be discriminated against in the workplace, which could result in unemployment for such groups.

What is Command Economy

In this type of economic system, the government retains complete control over the functioning of the market. Therefore, in certain industries, the government has influence over the prices of goods and services, as well as their quality, distribution methods, amount of output, and even the producers themselves.

The following is a list of features of an economy based on command −

  • A primary economic strategy devised and outlined by the government.

  • distribution of available resources by the governing body in accordance with the overall plan.

  • The central plan specifies the regulations governing the production, such as quotas and price restrictions, among other things. The purpose is to establish national priorities while simultaneously working toward the aim of ensuring that its residents receive a fair share of resources such as food, housing, and food.

  • It has been decided that the government would have monopoly ownership of enterprises in some industries, such as the utilities, finance, and automobile industries. This increases the level of domestic competition to zero.

  • In order to make the central plan more effective, laws, directives, and regulations are drafted.

The following is a list of the benefits of a command economy −

  • People's lives are made better as a result of the development of jobs, and the efficient use of resources since the interests of society are a top concern.

  • Because the government is in charge, it is simpler to manipulate natural resources without having to worry about violating environmental regulations or being subject to legal action.

Among the many drawbacks of a command economy are the following −

  • There is no guarantee that the supply of goods will meet the demand.

  • It inhibits creativity and originality.

  • It's possible that inadequate planning may cause us to disregard the requirements of society.

Similarities − Free Market Economy and Command Economy

  • Consumers and producers, service providers and product manufacturers, financial institutions, and labor unions are all examples of economic actors that are present in both economies.

  • The creation of products and services in response to the requirements of the market is the goal of both.

Differences − Free Market Economy and Command Economy

The following table highlights how a Free Market Economy is different from a Command Economy −

Characteristics Free Market Economy Command Economy


A free market economy is a market system in which the price of products and services is mostly set by the sellers and purchasers of those goods and services, and is thus based on demand and supply. This type of economy is also known as a market economy.

A command economy is an economic system in which the government maintains complete control over the functioning of the market system.

Government regulation

In a free market economy, the level of government regulation ranges from minimal to nonexistent, since the economic activity is controlled only by producers and consumers.

The government exercises control over an economy in the form of a command economy.


The maximizing of profits should be the primary focus of any economy that is based on free market principles.

In a command economy, social goals are prioritized in addition to larger macroeconomic ones.

Consumer preferences

In a capitalist economy based on free markets, the preferences of customers are taken into account.

In a command economy, the preferences of customers are not taken into account since the government makes all decisions about the goods produced and the quantity of those goods.

Innovation and economic development

Both innovation and development are fostered by economies that are based on free market principles.

The command economy does not foster creative problem-solving or technological advancement.

Business ethics

A free market economy leads to unethical commercial practices due to the unhealthy rivalry it generates. Inequality and unemployment are the natural consequences of this situation.

In a command economy, the government is in a position to exert control over the manner in which business is conducted, and as a result, both harmful business practices and unemployment are reduced.

Resource distribution

Because of the uneven distribution of resources that occurs within a free market economy, there is a significant wealth gap between the wealthy and the less fortunate.

A command economy helps to ensure that resources are distributed fairly, which results in a narrower gap between the affluent and the poor.

Preservation of natural resources

In a free market economy, the pressure to achieve higher levels of profitability can result in the mismanagement of natural resources.

The government is able to rein in excessive consumption of natural resources when it operates under a command economy.


A command economy is an economy in which the market system is fully controlled by the government, in contrast to a free market economy, which is a market system in which the pricing of goods and services is primarily determined by the sellers and buyers, and is therefore based on demand and supply. A free market economy is also known as a competitive market economy.

It is essential to keep in mind that the strategies that are successful in one country might not be applicable in another. Even though most countries utilize a combination of the two, it is vital to have a thorough understanding of the benefits and drawbacks of each system before putting any of them into practice.