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Advantages and Disadvantages of Command and Market Economy

The document compares the advantages and disadvantages of command economies and market economies. It notes that command economies allow for easier resource allocation according to national priorities, higher investment and growth rates, and more equitable income distribution. However, they require large bureaucracies that can be expensive and inefficient. Market economies promote consumer choice, competition, productivity and innovation through profits, but may underprovide public goods and overprovide "demerit" goods. Both systems have limitations around consumer sovereignty, efficiency, and externalities.

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216 views

Advantages and Disadvantages of Command and Market Economy

The document compares the advantages and disadvantages of command economies and market economies. It notes that command economies allow for easier resource allocation according to national priorities, higher investment and growth rates, and more equitable income distribution. However, they require large bureaucracies that can be expensive and inefficient. Market economies promote consumer choice, competition, productivity and innovation through profits, but may underprovide public goods and overprovide "demerit" goods. Both systems have limitations around consumer sovereignty, efficiency, and externalities.

Uploaded by

brokencyder
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Command Economy Advantages: 1.

Its easier for the government to direct resources in accordance with specific national goods 2. Higher growth rates as resources will be mainly directed towards investment 3. There will be a more equitable distribution of income as goods and services are largely distributes on needs basis 4. More efficient planning and training of labor to avoid unemployment. 5. Essential goods such as public goods and merit goods are readily produced while demerit goods are avoided 6. Social repercussions of production and consumption can be taken into account and externalities can be reduced Disadvantages: 1. The planned economy is the system of centralized and elective decision making that requires a huge bureaucracy to plan implement and monitor centralized decision making. This can be both expensive and cumbersome 2. Arbitrary pricing can lead to shortages and surpluses (shortages and surpluses signify misutilization of resources) eg. if the price of wheat is set to low quantity demanded will exceed quantity supplied and the market will run short of the commodity 3. Lack of incentive in form of profit to entrepreneurs would mean lack of productivity 4. Considerable loss of individual liberty at work and individual liberty to purchase goods consumers want (loss of consumer sovereignty) Market Economy Advantages: 1. Consumer sovereignty and greater use of the price mechanism. Thus more efficient allocation of resources producing what the market wants 2. Incentives to entrepreneurs in the form of profits and to workers in the form of higher wages, thus influencing productivity and innovation. 3. Greater choice and better standards of competitive pricing because of increased competition 4. Greater efficiency because the market is intolerant of inefficient producers who are knocked out if they fail to minimize losses( this market breeds efficiency) 5.Foreign investment maybe encouraged as investors seek to make profits in freely functioning markets with minimum government intervention

Disadvantages: 1.The private sector firms in minimizing cost can compromise on safety and environmental issues. 2. Consumer sovereignty. This is limited to those who have not only the willingness but the ability to pay aswell. This means that low income groups and underprivileged have no say in redirecting the allocation of resources in the economy 3. Public goods and merit goods are underdeveloped and demerit goods are over-provided 4. Modern technology and facilitated mass production means that large producers have gained market power and domination. Thus limiting the growth of competition and reducing the benefits which competition brings 5. The development of major cooperations and large firms with their ability to promote and advertise may influence and manipulate consumer sovereignty.

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