Command economies

Question 1

What are the characteristics of a command economy?

Answer 1

• Government owns and allocates resources deciding what,how and for whom to produce
• Government sets productions targets and growth rates according to its view of peoples wants
• Goods are allocated through rationing
• Workers are given job by the government
• Market prices do not inform resource allocation
• Queuing is used to ration scarce goods

Question 2

What are the advantages of a command economy?

Answer 2

• Resources are allocated by the government to maximise social welfare
• Relatively even distribution of income/wealth
• Workers are given jobs by the state (no unemployment)
• Adequate provision of public goods
• Government should take externalities into account in decision making
• Environmental protection possible
• Government can invest in economy infrastructure easily
• Policies to manage the macroeconomy
• Welfare safety net
• National interest considered rather than individual profits

Question 3

What are the disadvantages of a command economy?

Answer 3

• Danger of government failure
• Difficult for the government to set and correct output planning targets and fix prices appropriately
• Government may not have enough information to make good decisions
• Very bureaucratic
• Underemployment
• Lack of choice for consumers
• Lack of incentives to be innovative and entrepreneurial
• Lack of incentives to work hard
• Corruption is likely to develop
• Shadow market activity can flourish