Outline the Main Features of a Centrally Planned Economy
- Pages: 5
- Word count: 1126
- Category: Economics
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A Centrally Planned Economy is adapted in a state such as the Former Soviet Union where the state owns, operate and be in command of the industries of the country. The government also decided what to produce, how to produce and for whom to produce. The government usually employs all the population and pays for their wages and salaries; they also give them bonuses if they worked efficiently. Furthermore the government offers free services such as healthcare and education. There is also a nationwide equal treatment and distribution of wealth around the population.
The government controls all the industries in the country so there will be no private-owned companies which mean that there will be no need for these industries to make a profit, because it is not very important in a centrally planned economy. The government usually offers basic standards of living (not as superior as in the free market economy) and offers low prices for it’s produced products. Resources such as oil, coal, cotton, etc… are manufactured and used for the society and by the society, and is not exported to other countries because there is no such thing as foreign trade in a Centrally Planned Economy.
Prices for goods and services in the country are fairly stable and not very high so all the people working under the government can afford them, furthermore the society does not suffer from inflation because it is controlled by the government. Public goods, which are offered to the public by the government for the convenience of the whole country such as street lights and military defense are effectively used and driven. They are also non excludable and non rivalrous. The public pays for this service by taxation.
Furthermore Merit goods are also efficiently provided because they are recognized as socially desirable and everybody gains from it especially when the government offers it. As the government controls all the industries in the country, personal success of a certain individual is impossible because there is no chance of him/her opening a new firm or business in that type of economy. A Centrally planned economy tends to be inefficient because it is estimating the needs and wants of millions of people in the country, which will prove to be very hard in the long run.
This motive will therefore not thrive because the government will overproduce or sometimes even not provide as much consumer goods as needed, which leads to shortages. Another issue is over employment, which means employing more employees than required in a certain occupation. This is done by the government because there aren’t enough jobs to employ a worker in a certain sector to work in the most efficient method. One example is the Sea Port in Jeddah, Saudi Arabia. Furthermore, good and bad quality jobs have the same wages and benefits which de-motivate workers and therefore make them work less efficiently.
Technology and innovation does not take place as much as it does in other mixed and free market economies because of the lack of funding towards the capital goods and meanwhile concentrating on the consumer goods on the production possibility curve. Continuing on, recourses in a Centrally Planned Economy are not efficiently used and therefore wasted. Furthermore, the consumers do not have a wide choice of goods to purchase because the government creates all the goods to the consumer therefore there are no exported goods. Moreover people won’t spend their money because there is nothing to spend on.
In addition, foreign investment is put off because there are no chances for these investments to create any kind of profit. As we progress through the new millennium, more and more countries are moving towards the right on the economics scale. The number of Centrally Planned Economies notably decreased because it is found that it is an inefficient way of governing a country. To extend on my point, Centrally Planned Economies tend to lead to a shortage or surplus in produced supplies; additionally it wastes scares resources, offers high prices on luxuries such as cars and employs more people than actually needed.
Meanwhile, a mixed economy is made up of a public sector and a private sector. The demand originates from both the government and the public; in addition the government tries to provide the essentials such as free education. In the Mixed Economy there is a wider choice of goods for the consumers to buy because there are different product brands to buy from, this then results in better quality and lower prices because there is competition in the market with different firms earned by different individuals producing similar and different products for the satisfaction of the public.
Generally, there is no more monopoly existing (still some chances) because there are different firms producing different goods. The recourses in the country are used more efficiently by different firms. Furthermore people pay low taxes which create a higher standard of living. As a country moves from a Centrally Planned Economy to a Mixed Economy, some advantages are detached, for example, unemployment figures will rise because firms now have been privatized and will want to create a profit as its main aim. Therefore it will make a significant number of workers redundant.
A mixed Economy will create a big gap of inequality, which means that some people will benefit from this and become rich and other won’t understand what it requires and end up in the poor section. There is also no certain guarantee for all services because people will require to pay for the services so poorer people won’t be able to afford it. Firms with an advantage in the market will tend to offer higher prices for its goods and services e. g. Microsoft, which will increase the opportunity cost of the public, with Public and Merit goods underprovided.
Because of the changing market and economic climate, booms and slumps periods will take place, with the chances of inflation which will be unpleasant towards the general public. When a country moves to the right, it faces other types of problems. Under a planned economy prices were low, but when it is changed prices increase because the government no longer fixes the prices therefore shortages are created, one reason is that suppliers do not increase their supply on products with high demand (Price Mechanism).
Inflation is created because prices shoot up; wages and salaries remain constant so in the end living standards drop. In consequence the currency becomes weaker therefore imports become more expensive. Other serious issues that should be dealt with is to make the public understand the change in the system to survive. Furthermore the new mixed system should cope with entrepreneurs well. Some goods and services that used to be offered by the government for free are no longer free, one such example is education.