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Definition of a Command Economy:
A command economy
is an economic system in which a centralized authority controls production, prices, and distribution of goods and services.
Cuba and North Korea have command economies. A centralized authority controls the production and distribution of goods. Citizens may even be told where to work. The government owns companies and the resources used in the production process. Proponents of command economies believe that the government knows what is in the best interest of its citizens better than the citizens do themselves. These governments view capitalists, people who adhere to capitalism as selfish. By acting in their own interests, they hurt society. In command economies, the belief prevails that government alone can provide the security and stability by guaranteeing health care, housing, and jobs.
Command economies result in massive inefficiencies. Central planners establish production and distribution quotas. Shortages or surpluses result if the quotas differ from the quantity demanded at the price set by the government set price. It is virtually impossible for a central planner to determine the demand and price of millions of goods and services being offered in an economy. Delays in identifying and reestablishing quotas exacerbate the problem. For example, if the production of shirts is increased, resources must be re-allocated to increase production. Where will these resources come from? What should the central planner cut? Manufacturers wait for instructions from the central planner. Black markets flourish because citizens seek other sources for the goods and services they need. In a market economy, producers receive signals via price adjustments based on supply and demand to either increase or decrease production. The profit motive spurs them to respond accordingly.
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