March 19, 2018 

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REGULATION: Government rules or laws that control the activities of businesses and consumers. The motivation for regulation is that businesses are inclined to do things that are harmful to the public--actions which need to be prevented or otherwise controlled. Regulation is essentially an extension of government's authority to protect one member of society from another. It tends to take one of two forms--(1) industry regulation that's intended to prevent firms from gaining and abusing excessive market control and (2) social regulation that seeks to protect consumers for problems caused by pollution, unsafe products, and the lack of information (market failure).

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The assorted institutions that society uses to answer the three basic questions of allocation and address the fundamental problem of scarcity. Another, more popular term for economic system is economy. An economy, or economic system, is the structural framework in which households, businesses, and governments undertake the production and consumption decisions that allocate limited resources to satisfy unlimited wants and needs.
An economic system is primarily characterized by its key institutions, especially those relating to the ownership and control of resources and the means of production. Two real-world economic systems that differ based on key institutions are capitalism and communism. Capitalism is an economic system in which ownership and control is largely in private hands (businesses and households), as opposed to public hands (government). One of the key institutions underlying capitalism is private property rights. Communism, in contrast, is an economic system in which ownership and control predominately rests with government. Socialism is a third noted economic system that borrows institutions from both capitalism and communism.


Capitalism is undoubtedly at the top of any list of economic systems operating in the modern world. This system is based on: (1) private property--private ownership of resources and the means of production, (2) individual liberty--relative freedom on the part of the resource owners to use their resources as they see fit, and (3) competitive markets--a system of relatively competitive markets.

Under capitalism, governments establish the basic rules of the game and are responsible for the production of public goods, but the vast majority of resource allocation decisions are undertaken by individuals, as either consumers or producers. The United States is one of the more noted examples of capitalism. However, most modern industrialized economies of Europe, Asia, North America, and South America operate under capitalism.


In theory, communism is an economic system based on: (1) a classless society, (2) common ownership of resources, (3) no government, and (4) income distributed according to needs. As practiced in the real world, communism is an economic system based on (1) government ownership--government ownership and control of most resources and the means of production and (2) central planning--excruciatingly detailed and comprehensive resource allocation decision making by the central government.

Under real world communism, governments undertake the vast majority of the resource allocation decisions, with few decisions undertaken by individuals. The former Soviet Union was the primary example of real world communism before if disbanded in the late 1980s. China, Cuba, and a scattering of African nations continue to operate under various forms of communism.


In theory, socialism is the transition between capitalism and communism and is based on: (1) government ownership of resources and the means of production, (2) worker control of government, and (3) income distributed according to needs. As practiced in the real world, socialism is an economic system based on (1) nationalized industries--government ownership and control of key industries and (2) central planning--relatively detailed, but not comprehensive, resource allocation decision making by the central government.

Under real world socialism, governments exert extensive control over resource allocation decisions, primarily involving key industries such as transportation, energy production, communication, and health care. While Sweden exemplifies modern socialism, several European nations have practiced varying forms of socialism over the decades.

Two Pure Extremes

Capitalism, communism, and socialism are three real-world economic systems that exhibit varying degrees of decision making by individuals and governments and are part of a continuum bounded by two theoretical extremes--pure market economy and pure command economy.
  • Pure market economy: An idealized economy that relies exclusively on decisions made through markets to allocate resources.

  • Pure command economy: An economy that relies exclusively on decisions by governments to allocate resources.
Neither type of economic system currently exists in the world, nor has either EVER existed. Both ideals are best considered benchmarks that can be used for comparison. The key word that makes each a theoretical extreme is "exclusively." Real world economic systems rely on both markets and governments to allocation resources. While some real world economic systems come close to one extreme or the other, they never actually reach the ideal.


Recommended Citation:

ECONOMIC SYSTEM, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 19, 2018].

Check Out These Related Terms...

     | economy | capitalism | communism | socialism | market-oriented economy | pure market economy | pure command economy | central planning | laissez faire | free enterprise |

Or For A Little Background...

     | mixed economy | allocation | seventh rule of complexity | three questions of allocation | macroeconomics | economic goals | institution | ownership and control | private property |

And For Further Study...

     | seven economic rules | division of labor | microeconomics | specialization | distribution standards | nationalization | privatization | four estates | government functions | circular flow | business cycles | gross domestic product |

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