Planned Economy

Tuesday, February 05, 2013


Planned Economic System is an arrangement where all the economic questions are answered by government. Examples include; Cuba, China, North Korea etc.

A command economy is named so because the government has the power to control the nation’s economic resources. It is the government which decides how land, labour and capital shall be employed.

In a Command Economy, all the means of production are owned and controlled by the state. Production and distribution are aimed at maximizing welfare of the people. These economies are generally described as ‘Centrally Planned Economies’.


Features of Command Economy

  1. Public Ownership
In a Command Economy, economic resources are publicly owned.
    • Land and all types of capital are owned by the state.
    • Private ownership is limited to personal possessions and small businesses.
    • Resources are publicly owned in order to distribute income and wealth more equally.
    • There will be no personal income derived from the ownership of property.
  1. Planned Production
Economic activities in the Command Economy are carried out according to a national plan.
·         Resources are allocated to industries by the government directives.
·         Economic questions are answered by the state.

  1. Price
In a Command Economy, prices are fixed by the government. Price does not change in response to the changes in demand and supply.

  1. Aim of Production
In a Command Economy, production is carried out for the welfare of the people but not to maximize profit.

Advantages of Command Economic System

1.    Economic activities are free from instability
2.    Income and wealth are equally distributed
3.    Every citizen is provided with minimum requirements like food, clothing, health and education
4.    The nation has command over its economic activities
5.    Economic activities are well planned and targets are fixed. Resources are allocated for the realization of these targets

Disadvantages of Command Economic System
1.    Less consumer choice as it provides only a limited range of goods and services
2.    Absence of competition leads to reduce the quality of products
3.    Lack of profit motive leads to lack of initiative and invention
4.    In most command economies, there is a shortage of goods which push up the prices of most essential goods
5.    Higher degree of government influence leads to beaurocracy and its drawbacks like corruption and bribery

Why do government exercise control over the economy

1.    To minimize inequalities in income and wealth
2.    To minimize the evil effects of economic instability
3.    To control dominant firms
4.    To provide welfare measures for the economically weaker section of the society
5.    To evaluate the social costs and social benefits of various economic activities and to decide whether or nor to carry out these activities
6.    To provide merit goods and services
7.    To provide public goods and services

Difference between the Market and Command Economic System

Market Economies
1.    Resources are privately owned
2.    It has freedom of choice
3.    Resources are allocated through the price mechanism
4.    Aim of production is to maximize profits
5.    Prices are determined by the market forces of demand and supply
6.    Inequalities in income and wealth
7.    Merit goods and services and public goods and services are not provided
8.    More consumer choice. Wider range of goods and services are available

Command Economies
1.    Resources are publicly owned
2.    No freedom of choice
3.    Resources are allocated by the government directives
4.    Aim of production is welfare
5.    Priced are fixed by the government
6.    Equal distribution of income and wealth
7.    Merit goods and services and public goods and services are provided
8.    No consumer choice. Limited range of goods and services are available
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