Advantages and Disadvantages of a Planned Economy

An economic system refers to the way in which governments or societies are organized to facilitate the production, distribution, and exchange of goods and services. An economic system facilitates the utilization of factors of production such as land, labor and physical resources in the production and distribution of goods and services. It includes various institutions, agencies, producers and consumers, decision making processes, rules, and consumption patterns.

One of the three most common economic systems is the planned market system, also known as a command economy. Others include free market economy and mixed economy. A command economic system is characterized by the dominance and control of a centralized authority, usually a government. Under this economic system, almost the entire economic structure is controlled by the government. Furthermore, production decisions and allocation of resources are decided by the state. The planned economic system works well if the government makes decisions with the best interests of citizens in mind.

There are several advantages and disadvantages associated with the planned or command economic system.

Advantages of a Planned Economy

  1. The command economic system avoids economic instability since the centralized government develops plans on how resources are shared or utilized.
  2. It also minimize negative externalities that are usually associated with free market systems.
  3. Makes adequate provision of public and merit goods i.e. education, health and safety.
  4. Facilitate the shift of resources in pursuant of grand schemes such rapid industrialization
  5. Puts checks on monopoly power which are controlled by state monopolies (Parastatals).
  6. A planned economy also ensures that there is full employment in the economy.
  7. Furthermore, this type of economic system is usually associated with low inflation rates..
  8. Minimum waste of resources.

Disadvantages of a Planned Economy

  1. There is wastage of resources in production because consumers demand is judged in advance without the use of price mechanism.
  2. The cost of gathering information for planning is expensive to the state.
  3. There is no individual incentives and initiative for hard work and innovation.
  4. The power of consumer sovereignty is curtailed.
  5. There is no incentive for hard work and this discourages the suppliers
  6. Some resources may end up being underutilized
  7. Difficulty in estimating demand due to different time frames i.e. Decembers and end month and sometimes during certain occasions such as valentine demand tends to rise.

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