Planned Economy

                                        

Command Economy is defined as an economic system where all or most of the means of productions are owned and controlled by government such that it makes all decisions regarding the production and distribution of goods and services. Command Economy is also referred as Centrally-Planned Economy, Planned Economy or Socialist Economy. In this system, government has complete control over the economy. In a command economy, resources are allocated by government through centralised planning. The major problems related to resource allocation are solved through government directive. The examples of Command Economy include North Korea and Cuba.

Features of Command Economy

1. Public ownership The most important feature of Command Economies is public ownership of the means of production. The land and other economic resources are owned by the state. Private ownership is limited to personal possessions.

2. Planned production Production is carried out according to a national plan. Resources are allocated through a planning process. The state makes a plan in which it sets target levels of output for all firms in the economy.

3. Fixed Prices In a centrally planned economy prices are not free to change in response to changes in supply and demand. In contrast, prices are fixed by the government. A shortage of goods will be solved by physical rationing.

4. Welfare motive The welfare of the community as a whole is the main aim of the government in a command economy.

Advantages of Command Economy

1.       More equal distribution of income and wealth The public ownership and control on the resources helps the government to distribute the benefits from these resources evenly and fairly between the citizens. This helps to eliminate poverty.

2.       Stability in the economy As production and distribution are carried out through centralized planning, the government takes the necessary corrective measures to solve the economic problems and stabilize the economy.

3. Provision of public goods and merit goods Unlike Market Economy, with the motive of maximizing public welfare, the government provides public goods and merit goods for its people. Moreover, these goods are provided equally and fairly to everyone.  

4.  Social costs and social benefits are considered The welfare motive of the government gives a great importance to reduce the social cost and achieve the maximum social benefit. The government only considers the benefit for the society rather than the benefit for one or few individuals.

Disadvantages of Command Economy

1. Loss of consumer sovereignty In Command Economy, less importance is given for consumer wants. The government control on production and distribution limits the choices for the consumers. The goods and services are not produced according to consumers’ tastes and preferences.

    

2. Lack of competition As all or most of the resources are controlled by the government, there is no competition between individuals and firms. Individuals do not compete each other for a better living status. Firms they work with the government’s aim of maximizing public welfare. Absence of competition will reduce the quality and efficiency of production and the performance of the economy as a whole.

3. Lack of innovation The absence of profit motive will limit the innovation. The firms feel it less important to acquire or invent new products, new ideas, new techniques and new technologies as they have no rivals to compete.

4. Inefficient resource allocation Lack of price system will lead shortage of some goods and surplus of others. Government decides the allocation of resources to produce goods and services, irrespective of consumer wants. Hence, resources may not be used for their best.

5. Individual freedom is restricted Economic agents involved should follow and obey the command or decisions of the government. Consumers do not have the freedom to choose between their wants. Workers do not have the freedom to bargain about their wages and salaries mean while they do not have the right choose or leave jobs any way they wish.

6. Rationing system creates wastage of time for consumers Subsidies on essential goods and services quickly lead to shortages. Therefore queuing is common in command economies. This wastes time in Long queues.