Is a system where all major economic decisions are made by a government ministry or planning organisation. Here all questions about the allocation of resources are determined by the government.
Features of this system
The command economies relies exclusively on the state. The government will decide what is made, how it is made, how much is made and how distribution takes place. The resources – factors of production – on behalf of the producers and consumers. Price levels are not determined by the forces of supply and demand but are fixed by the government. Although division of labour and specialisation are found, the planned economies tend to be more self-sufficient and tend to take part in less international trade than market economies.
Advantages of Planned System
i) Uses of resources: Central planning can lead to the full use of all the factors of production, so reducing or ending unemployment.
ii Large scale production: Economies of scale become possible due to mass production taking place.
iii. Public services: “Natural monopolies” such as the supply of domestic power or defence can be provided efficiently through central planning.
iv) Basic services: There is less concentration on making luxuries for those who can afford them and greater emphasis on providing a range of goods and services for all the population.
v) There are less dramatic differences in wealth and income distribution than in market economy
Disadvantages of the Planned System
The centrally planned economies suffer from the following limitations:
Lack of choice: Consumers have little influence over what is produced and people may have little to say in what they do as a career.
Little incentive: Since competition between different producers is not as important as in the market economy, there is no great incentive to improve existing systems of production or work. Workers are given no real incentives to work harder and so production levels are not as high as they could be.
Centralised control: Because the state makes all the decisions, there must be large influential government departments. The existence of such a powerful and large bureaucracy can lead to inefficient planning and to problems of communication. Furthermore, government officials can become over privileged and use their position for personal gain, rather than for the good of the rest of the society. The task of assessing the available resources and deciding on what to produce, how much to produce and how to produce and distribute can be too much for the central planning committee. Also the maintenance of such a committee can be quite costly.