Central Planning Economy  

Definition – A centrally planned economy is an economy where decisions on what to produce, how to produce and for whom are taken by the government.

Central planning is associated with a Communist economy; the theory is that the government will overcome market failure and achieve equality of distribution. Supporters of centrally planned economy argue that when economic decisions are left to the free market. Monopolies emerge to exploit consumers. Furthermore, the Capitalists (those who own private property) can earn money through the labour of others.

Examples of Central Planning

- The Soviet Union 1917-1991 and Soviet Bloc

For example, the Soviet Union often announced ‘5 year plans’ where targets for steel production would be created.

Problems of Central Planning Economies

  1. Governments poor at predicting future trends
  2. Lack of incentives when income is guaranteed
  3. Inflexible. Difficult to respond to shortages and surpluses

 

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