Command Economy - Explained
Written by Jason Gordon
Updated at April 27th, 2023
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What is a Command Economy?
A command economy is an economy whereby all means of production are owned and controlled a central authority (the Government).
How Does a Command Economy compare to a Planned Economy?
A command economy constitutes a planned economy when the government controls or manages what is produced, how it is produced, and the price of production.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How Does a Command Economy compare to a Market Economy?
In a free market, production and prices of goods and services are determined by demand and supply. The market economy is marked by competition.
In contrast, in a command, production and prices are controlled by a central authority (the government). Because the central authority has control over markets, there is little or no competition.
How do Monopolies arise inCommand Economies?
Monopolies or monopoly markets are a salient feature of command economies. The central authority empowers a single producer to produce the entire supply of identified goods and services.
What are some negative consequences of Command Economies?
The negative aspects of a command economy include:
- Prices of goods and services are set based on the needs of the government resulting in inefficiency of output and demand.
- Also, because the command economy is controlled by a central authority, this central authority might not be able to efficiently manage market mechanisms due to limited knowledge in the market.
- Inability of the government to efficiently decide on what goods and what quantity to produce can cause shortages or surpluses in command economies.
- Difficulty in responding to the dynamic nature of demand is another drawback of command economies.
What are some benefits of Command Economies?
The benefits of a command economy include:
- One of the arguments in favor of a command economy is that the allocation of resources (prices) and control of the means of production are tailored towards social welfarism. That is, government allocate prices strictly to cater for social needs.
- Another argument is that command economies tend to control employment levels better than countries that practice free market. This means that government of command economies create employment opportunities when the need arises.
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