Question

How are economic decisions made in a command economy?

Short answer

Economic decisions in a command economy are made by the government, which controls resources, production, and pricing.

Step-by-step solution

Understanding Command Economy

In a command economy, the government or central authority makes all economic decisions. This means that the government controls major aspects of the economy and production, deciding what goods and services are produced, how they are produced, and who gets them.

Identifying Key Role of Government

In a command economy, the government determines the allocation of resources and sets production targets for producers. It decides the prices for goods and services, controls wages, and may even dictate the jobs people do.

Evaluating the Citizens' Role

Citizens in a command economy have limited influence over economic decisions. They do not choose what to produce or what prices to pay; rather, they follow the government's predetermined plans and directives.

Key concepts

Government Control

In a command economy, government control is the driving force behind all economic activities. Unlike market economies where supply and demand dictate production and pricing, in a command economy, the central government takes charge. This includes determining what products should be manufactured, the methods of production, and their distribution.
For example, the government might decide that more factories need to be built, or that resources should be allocated towards certain sectors such as healthcare or education. This is intended to serve the collective betterment of society, as deemed by the authorities.
The idea is to eliminate the chaos and inequality that can occur in market-driven economies by handing over decision-making power entirely to the state. This can result in stability and uniformity across the economy but may also lead to inefficiencies due to a lack of competition and innovations.

Resource Allocation

In a command economy, resource allocation is centrally managed by the government. They decide how resources like labor, land, and capital are used throughout the country. This control allows the government to focus resources on specific areas that they consider of national importance, such as defense, infrastructure, or strategic industries.
Since the authorities control allocation, they have the power to ensure that essential resources are available to achieve national objectives. For example, if increasing agricultural output is a priority, more funds and resources may be allocated to farming technologies and rural development.
Resource allocation in this context is aimed at minimizing waste and ensuring that all parts of the economy receive what is needed according to government plans. However, this can sometimes lead to shortages or surpluses, as the system lacks the flexibility to adapt quickly to changing conditions and preferences.

Production Targets

Production targets in a command economy are set by the government to guide how much of each commodity or service is produced. These targets are usually based on strategic priorities, such as boosting economic growth or enhancing social welfare.
Once targets are set, industries and factories are instructed to produce specific quantities over designated periods. The idea is to synchronize production processes with the nation's broader economic goals.
This system helps the government ensure that all sectors are working cohesively toward collective aims. However, the downside is that producers have little room for innovation or adaptability, as they must strictly adhere to government directives.

• This can result in reduced motivation for efficiency improvements
• There can be delays in responding to consumer needs and market trends

Despite these challenges, production targets aim to promote equal distribution and eliminate the unpredictable nature of market economies.