key term - Command Economies

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. The government controls the factors of production, such as capital and natural resources, and directs economic activity through centralized planning.

5 Must Know Facts For Your Next Test

1. Command economies are characterized by the government's control over the factors of production and the allocation of resources.
2. In a command economy, the government sets production targets, determines prices, and directs the distribution of goods and services.
3. Command economies often rely on centralized planning, where the government makes decisions about what to produce, how much to produce, and where to allocate resources.
4. The lack of market forces and competition in a command economy can lead to inefficiencies, shortages, and a lack of innovation.
5. Examples of command economies include the former Soviet Union, China (prior to market reforms), and North Korea.

Review Questions

• Explain how the government's control over the factors of production and resource allocation is a defining characteristic of a command economy.
  • In a command economy, the government owns and controls the factors of production, such as land, capital, and natural resources. This allows the government to make all decisions about what to produce, how much to produce, and how to distribute goods and services. The government sets production targets, determines prices, and directs the flow of resources, rather than allowing market forces to determine these outcomes. This centralized control over the economy is a key feature that distinguishes command economies from market-based economies.
• Describe the potential drawbacks of a command economy compared to a market-based economy.
  • One of the primary drawbacks of a command economy is the lack of market forces and competition, which can lead to inefficiencies, shortages, and a lack of innovation. Without the profit motive and consumer demand driving production, command economies may struggle to allocate resources effectively and meet the diverse needs of the population. Additionally, the centralized planning process can be slow to respond to changing economic conditions, and the government's control over prices and production targets can distort market signals and lead to misallocation of resources. These factors can result in a lower standard of living and a less dynamic economy compared to market-based systems.
• Evaluate the role of government intervention 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 much more active and dominant role in directing economic activity compared to a market economy. While governments in market economies may intervene to address market failures or pursue specific policy objectives, the government in a command economy exerts direct control over the factors of production, resource allocation, and the distribution of goods and services. This high degree of government intervention and centralized planning is a defining feature of command economies, in contrast to the more limited role of government and reliance on market forces in market-based systems. The government's extensive control over the economy in a command system can have both advantages, such as the ability to rapidly mobilize resources for strategic priorities, as well as disadvantages, such as reduced innovation and responsiveness to consumer demand.

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 Allocation: The distribution of resources and goods based on the government's directives and priorities, rather than market forces.

State Ownership: The government's ownership and control of the means of production, including factories, land, and natural resources.