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Types of Economies

Explore the three main types of economies — command, market and mixed. Learn how each system functions, their pros and cons, and how they shape societies, trade and everyday life around the world.

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Read time 6 minutes

Dr. Alexander Theisen

Published on Apr 16, 2025

Written By

Dr. Alexander Theisen

Instructor,

Colangelo College of Business

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Hayek, F. A. (2018, Feb. 5). The Use of Knowledge in Society. Econlib. Retrieved Feb. 18, 2025.
Lockert, M. and Safane, J. (2024, Oct. 30). What Is the Invisible Hand? A Guide To Adam Smith's Economic Theory. Business Insider. Retrieved Feb. 18, 2025.

Approved and verified accurate by the instructor of economics of the Colangelo College of Business on March 27, 2025.

The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of Grand Canyon University. Any sources cited were accurate as of the publish date.

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Pros and Cons of Different Types of Economies

Which economic system is preferred over another is mostly based on one’s underlying values; what circumstances and outcomes matter to an individual based on their beliefs and worldview.

Economists typically distinguish between two guiding objectives about how resources should be used:

Efficiency — making sure that, given your resources, the maximum amount of benefits, according to some metric, are achieved
Equity — which people benefit from the use of different resources and whether those benefits are distributed in a “fair” manner

Planned economies are often based on predetermining who benefits from a specific use of resources and are aimed at minimizing risk and avoiding what are seen as potentially “unfair” outcomes. This can potentially come at the cost of efficiency; planners usually know less than what every individual in society knows when added together. Since a market allows individuals to respond to prices in a way that makes sense to them given their own circumstances, the prices end up more effectively responding to those circumstances than any planner could.

Additionally, market economies preserve some degree of individual freedom. If I disagree with a planner, I don’t have many options, whereas a market allows me to buy and sell as I choose in response to the prices I can receive or pay. It’s important to remember that in a market, how much freedom or options you have depends on the income you receive by selling your individual resources and what options other people have chosen to provide you with given their own resources. There’s no way for one person to get whatever they want at no cost, regardless of the system.

What Types of Economic Systems Are the “Best”?

I think it’s safe to say that most economists today tend to think neither a pure planned economy nor a pure market economy is ideal, meaning they favor a mixed economy. That said, economists tend to favor markets for most uses of resources since they preserve room for people to make their own decisions about how they buy and sell. They incorporate more information (in the form of prices) into each decision than any one single planner could reasonably utilize.

This also means that economists tend to think that the government should limit itself to acting in one of two situations, often called “market failures”:

Externalities — where the production of some good creates some benefit for someone who does not directly pay for it or imposes some cost on someone else without paying for it. In that case, relying on the market price to coordinate the use of resources will mislead buyers and sellers as to the actual costs and benefits of the decisions they make.
Market power — where some individual buyer or seller (or organized group of buyers or sellers) controls the market price and therefore manipulates the price to their own benefit at the expense of everyone else.

Different Types of Economic Systems and What They Mean

Economists classify economies based on how resources are allocated between different uses and how the goods that result from those resources are distributed. In all economies, individuals are interdependent. How I use my resources impacts what is available for you, and everything I consume was produced by someone else using resources that I do not personally control.

The main difference lies in how people interact and how their decisions are coordinated among each other; do people answer to direct commands or plans from above or do they make their own decisions based on their own individual circumstances of time and place, as described by the economist Friedrich Hayek.¹

The main three types of economies, or ways of allocating resources for society, are traditionally categorized as follows:

Planned or Command Economy

In a planned or command economy, all the resources available to the economy are allocated among different uses by some single authority (usually a government) according to a predetermined plan created by that authority. This authority could be democratically elected, though these types of economies tend to also have centralized political power. Importantly, individuals can only make decisions about how to use resources to the extent to which that is allowed for by this central plan.

Market Economy

In a market economy, there is no overarching, predetermined plan. Resources are entirely privately owned by individuals and businesses and those resources are bought and sold by those individuals and businesses in markets; those actors make their decisions purely based on their own goals and interests in response to prices determined by competition for buyers and sellers in each market. In these types of economies, each actor in the market decides what to do with their own resources, but those decisions are all coordinated with one another by prices.

Mixed Economy

Within a mixed economy, essentially all economies in the modern world include some aspects of both planned and market economies. These economies differ in the extent to which they rely on one or the other method of allocating resources. Economies exist on a spectrum, with some leaning more toward market allocations of resources and others relying more on the government to allocate resources.