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Outline the positive and negative features of the command economy.

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06.12.03 Outline the positive and negative features of the command economy The essential economic problem is limited resources, such as land, labour, capital and enterprise, in relation to unlimited wants. Because of this, people need to answer the three basic economic questions: what to produce, how to produce and for whom to produce. Therefore there is a need for effective resource allocation with effective answers or rather methods of organizing the production, distribution, exchange, sharing goods and services. Allocation of scarce resources is organized through several different economic systems. The idea of the command economy is to answer the three basic economic questions completely by the government (not by the market forces) and that means also that all factors of production are owned by the government. It is based upon the Karl Marx's (1818-1883) theory that all people are equally. This way of answering the questions is not perfect and hence contain both advantages and disadvantages. Positive features1 The Government is very powerful (so overall there is the possibility to grow economically very quickly from a poor background) ...read more.


Because they are just quantitative, growth occurs, but without development. A good real world example are the consequences of the cold war (1945-1991): there was an increase in the output of military goods, but no equal increase in the output of civilian goods, therefore no development: diagram 1: PPF 14 The consumer could only choose to spend income on those things the government decided to produce. Consumer wishes were often a poor third in the plan after investment needs and defence needs were met.5 Production costs are not reflected in prices. For example, it may cost more to produce a good or service, than the purchased price is. Since prices act not as signals, the government just suppressed the inflation, because it is not possible to convert prices because of the difference of inside parameters to outside parameters. One of the results is that the economy is when not able respond quickly to new conditions. And so there is only little economic efficiency, first, because in reality there is unemployment, (it is likely to be hidden or disguised), but many people produced very little, their marginal product is very low, inefficiency is high and secondly, the principles of ...read more.


Diagram 2: PPF 28 The comparison with a country without command economy shows that the other country is nearer to the PPF and the command with command economy is not close enough to the PPF, that means there is ineffective use of factors of production. The aim to maximize profits is more important to the human nature than to serve the public interest. Yet it is not completely useless - the positive features, to produce more public/merit goods, use all combinations of factors of productions and produce for all people, are integrated so that the economy is nearer to the PPF, by using the command concepts of the circular flow of income, transfer payments, commodity agreements, taxes and price controls. 1 Ideas from webnotes #108, #109 & #113 from economics.isdedu.de 2 Idea from Economics from a global perspective, Second Edition, Alan Glanville, p.195 3 Ideas from webnote #101 4 Diagram from Economics from a global perspective, Second Edition, Alan Glanville, p.14 5 Idea from Economics from a global perspective, Second Edition, Alan Glanville, p.196 6 From the free wikipedia encyclopedia 7 Idea from Economics from a global perspective, Second Edition, Alan Glanville, p.195 8 Webnote #116 1 ...read more.

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