Command Economy

Definition

A command economy is an economic system where the government, rather than the market, makes all decisions about the production and distribution of goods and services. In a command economy, the government controls the factors of production and makes all choices about what to produce, how much to produce, and for whom to produce.

5 Must Know Facts For Your Next Test

1. In a command economy, the government sets production targets, allocates resources, and determines prices, rather than allowing the free market to determine these factors.
2. Command economies are often associated with socialist or communist political systems, where the government owns the means of production and plans the economy.
3. The lack of market forces and competition in a command economy can lead to inefficiencies, shortages, and a lack of innovation, as there are no incentives for producers to respond to consumer demand.
4. Examples of command economies include the former Soviet Union, China under Mao Zedong, and North Korea.
5. The transition from a command economy to a market-based economy, known as 'economic reform' or 'privatization,' can be a challenging and complex process.

Review Questions

• Explain how the government's role in a command economy differs from that of a market economy.
  • In a command economy, the government makes all the decisions about production, investment, and distribution of goods and services, rather than allowing the free market to determine these factors. The government sets production targets, allocates resources, and determines prices, rather than letting supply and demand drive these decisions. This centralized control contrasts with the decentralized, market-driven decision-making process in a market economy.
• Describe the potential advantages and disadvantages of a command economy compared to a market economy.
  • Potential advantages of a command economy include the government's ability to quickly mobilize resources and respond to emergencies, as well as the potential for more equitable distribution of goods and services. However, disadvantages can include a lack of incentives for innovation and efficiency, shortages of goods due to poor planning, and the suppression of individual economic freedom. Command economies often struggle to adapt to changing consumer demands and technological advancements, leading to economic stagnation and inefficiencies.
• Evaluate the challenges involved in transitioning from a command economy to a market-based economy.
  • Transitioning from a command economy to a market-based economy, known as 'economic reform' or 'privatization,' can be a complex and challenging process. It often requires the government to relinquish its control over the factors of production, liberalize prices, and encourage the development of private enterprise and competition. This transition can be politically and socially disruptive, as it can lead to job losses, inflation, and the redistribution of wealth. Successful economic reforms often require a carefully sequenced and gradual approach, as well as the establishment of robust legal and regulatory frameworks to support the new market-based system.

Related terms

Centralized Planning: The process by which a central authority, such as the government, makes decisions about the production, investment, and distribution of goods and services in an economy.

Planned Economy: An economic system in which the government, rather than the market, makes decisions about the production, investment, and distribution of goods and services.

State-Owned Enterprises: Businesses that are owned and controlled by the government, rather than private individuals or shareholders.