Command Economy

Definition

A command economy is an economic system in which the government makes all decisions about the production and distribution of goods and services. In this system, the central authority controls resources, sets prices, and determines what to produce, often with the intention of achieving specific social or economic goals. This centralized control contrasts with market economies where supply and demand dictate economic activity.

5 Must Know Facts For Your Next Test

1. Command economies often aim to achieve equality in resource distribution, attempting to eliminate the wealth gap found in capitalist systems.
2. The Soviet Union is one of the most notable examples of a command economy, where the government controlled all aspects of economic life.
3. In command economies, the lack of competition can lead to inefficiencies and shortages, as there is no market feedback to guide production decisions.
4. Decisions made by central planners in command economies may not reflect consumer needs, leading to misallocation of resources.
5. Transitioning from a command economy to a market-based system can be challenging and often results in significant social and economic upheaval.

Review Questions

• Compare and contrast a command economy with a market economy in terms of decision-making processes and resource allocation.
  • In a command economy, decision-making is centralized and made by the government, which determines what goods are produced, how they are distributed, and at what prices. In contrast, a market economy relies on individual consumers and producers to make these decisions based on supply and demand. This results in resource allocation that reflects consumer preferences in a market economy, while a command economy may struggle with inefficiencies due to its lack of responsiveness to market signals.
• Evaluate the advantages and disadvantages of a command economy in achieving social welfare goals compared to other economic systems.
  • One advantage of a command economy is its potential for achieving social welfare goals such as income equality and universal access to basic services. However, the disadvantages include inefficiencies, lack of innovation, and difficulties in meeting consumer demands due to centralized decision-making. While command economies can prioritize social objectives, they often face challenges in sustainability and adaptability compared to mixed or market economies that can respond more dynamically to changing needs.
• Analyze the impact of transitioning from a command economy to a market economy on a country's social structure and economic performance.
  • Transitioning from a command economy to a market economy can significantly alter a country's social structure and economic performance. Socially, it may lead to increased inequality as wealth becomes concentrated among those who adapt quickly to new market conditions. Economically, while this transition can drive growth and innovation by encouraging competition, it may also result in instability during the adjustment period. Additionally, sectors that were heavily state-controlled may face challenges as they adjust to new market realities, causing disruptions in employment and services.

Related terms

Planned Economy: An economic system where the government makes all decisions regarding the economy, similar to a command economy, focusing on directing resources toward specific objectives.

Socialism: An economic and political system in which the means of production are owned and regulated by the community or the state, often associated with command economies.

Mixed Economy: An economic system that combines elements of both capitalism and socialism, allowing for some degree of private enterprise alongside government regulation.