Command Economy

Definition

A command economy is an economic system in which 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 the major economic decisions, such as what to produce, how much to produce, and how to distribute the goods and services.

5 Must Know Facts For Your Next Test

1. In a command economy, the government sets production quotas, determines prices, and allocates resources, rather than allowing the free market to determine these factors.
2. Command economies are often associated with centralized, authoritarian governments, such as those found in communist or socialist countries.
3. The lack of market forces and individual economic freedom in a command economy can lead to inefficiencies, shortages, and a lack of innovation.
4. Examples of command economies include the Soviet Union, China under Mao Zedong, and North Korea.
5. Command economies are in contrast to market economies, where the production and distribution of goods and services are determined by the free market rather than the government.

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 plays a much more active and centralized role in making economic decisions, such as what to produce, how much to produce, and how to distribute goods and services. The government controls the factors of production and makes all the major economic decisions, rather than allowing the free market to determine these factors. This is in contrast to a market economy, where the production and distribution of goods and services are determined by the free market rather than the government.
• Describe the potential advantages and disadvantages of a command economy compared to a market economy.
  • Potential advantages of a command economy include the ability to quickly mobilize resources for large-scale projects, such as infrastructure development or military buildups, and the potential for more equitable distribution of resources. However, potential disadvantages include a lack of individual economic freedom, inefficiencies in resource allocation, shortages of consumer goods, and a lack of innovation due to the absence of market forces. Command economies are often associated with centralized, authoritarian governments, which can lead to a concentration of power and a lack of accountability.
• Analyze the role of the government in a command economy and explain how it differs from the government's role in a mixed economy.
  • In a command economy, the government plays a dominant and centralized role in making all economic decisions, controlling the factors of production, and determining the production and distribution of goods and services. This is in contrast to a mixed economy, where the government plays a more limited role, primarily in areas such as providing public goods, regulating the market, and addressing market failures. In a mixed economy, the government and the free market both play important roles in the economy, with the government intervening to correct market failures or to achieve social and economic objectives, while still allowing the market to determine the majority of economic outcomes.

Related terms

Centrally Planned Economy: A centrally planned economy is a type of command economy where the government, rather than the market, makes all decisions about production, investment, and the distribution of resources.

Socialism:

Socialism is an economic and political system in which the means of production are collectively owned and controlled by the government, rather than by private individuals or corporations.

Communism:

Communism is a political and economic system in which the government owns all property and resources, and all citizens are expected to work for the common good, rather than for personal profit.