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. The government controls the factors of production, including capital, labor, and natural resources, and directs economic activities to achieve desired outcomes.
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In a command economy, the government sets production targets, determines prices, and allocates resources, rather than allowing the free market to determine these factors.
Command economies are often associated with socialist or communist political systems, where the government owns the means of production and aims to achieve social and economic equality.
The lack of market competition and individual decision-making in a command economy can lead to inefficiencies, shortages, and a lack of innovation.
Examples of command economies include the former Soviet Union, China (prior to economic reforms), and North Korea.
The transition from a command economy to a market-based economy, such as the economic reforms in China and the former Soviet Union, can be a complex and challenging process.
Review Questions
Explain the key features of a command economy and how it differs from a market economy.
In a command economy, the government, rather than the free market, makes all decisions about the production and distribution of goods and services. The government controls the factors of production, including capital, labor, and natural resources, and directs economic activities to achieve desired outcomes. This is in contrast to a market economy, where the decisions about what to produce, how to produce it, and for whom to produce it are primarily made by private individuals and businesses in response to market signals, such as prices and consumer demand.
Analyze the potential advantages and disadvantages of a command economy compared to a market economy.
Potential advantages of a command economy include the ability to rapidly mobilize resources to achieve specific economic and social goals, the potential for greater economic equality, and the ability to avoid the perceived inefficiencies of market competition. However, potential disadvantages include a lack of individual decision-making and innovation, the potential for shortages and inefficiencies due to the government's limited information, and the potential for corruption and abuse of power by the central authority. The transition from a command economy to a market-based economy can also be a complex and challenging process.
Evaluate the role of the government in a command economy and how it differs from the government's role in a market economy.
In a command economy, the government plays a central and dominant role in directing economic activities, allocating resources, and making decisions about production and distribution. The government owns the means of production, sets production targets, determines prices, and controls the distribution of goods and services. This is in contrast to a market economy, where the government's role is more limited, primarily focused on providing a legal and regulatory framework, addressing market failures, and ensuring a stable macroeconomic environment. In a market economy, the government largely allows the free market to determine the allocation of resources and the production and distribution of goods and services.
Related terms
Centralized Planning: The process by which a central authority, such as the government, makes decisions about the allocation of resources and the production of goods and services in a command economy.
Planned Economy: An economic system where the government, rather than the free market, determines what goods and services will be produced, how they will be produced, and how they will be distributed.
State-Owned Enterprises: Businesses that are owned and controlled by the government in a command economy, where the government makes decisions about production, pricing, and distribution.