Difference between centrally planned economy and market economy?

Question

Accepted Answer

A market economy is one in which all economic activities are organised through the market and price mechanism. Profit or self-interest is the key objective. As against it a centrally-planned economy is one in which all important activities are planned and decided by central planning authority or government. Maximisation of social welfare is the key objective.For more details on market economy and centrally planned economy, refer here:

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Organisation of Economic Activities:The Centrally Planned Economy and The Market Economy - Economics

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Answer

Market economy is profit motive organization whose all decisions are taken by free play of market role .centrally planned economy is welfare motive organization whose all decisions are taken by government.

Answer

Centrally Planned Economy:
A centrally planned economy, also known as a command or socialist economy, is a system where the government has complete control over economic decisions and resource allocation. In this type of economy, the government sets production targets, determines prices, and decides how resources will be distributed. Here are some key characteristics of a centrally planned economy:

1. Government Control: The government owns and operates most industries and businesses, making all important economic decisions.

2. Allocation of Resources: Resources are allocated based on the government's priorities and plans rather than market forces or consumer demand.

3. Price Determination: Prices are set by the government, often with the aim of ensuring affordability for the population. However, this can lead to imbalances and inefficiencies.

4. Production Targets: The government sets production targets and quotas for different industries and sectors, dictating what and how much should be produced.

5. Income Redistribution: The government aims to reduce income inequalities by redistributing wealth through taxation and social welfare programs.

Market Economy:
A market economy, also known as a capitalist or free market economy, is a system where economic decisions are primarily driven by supply and demand in the marketplace. In this type of economy, individuals and businesses make decisions based on their self-interest, aiming to maximize their profits. Here are some key characteristics of a market economy:

1. Private Ownership: Most industries and businesses are privately owned, and individuals have the freedom to own and control property and resources.

2. Market Forces: Prices and resource allocation are determined by the forces of supply and demand, rather than government intervention.

3. Profit Motive: Individuals and businesses are motivated by profit incentives, which drive competition and innovation in the marketplace.

4. Consumer Sovereignty: Consumers have the freedom to choose what goods and services they want to purchase, influencing production decisions.

5. Limited Government Intervention: The government's role is typically limited to enforcing property rights, ensuring market competition, and providing public goods and services.

Key Differences:
While both centrally planned and market economies aim to allocate resources efficiently, there are significant differences between them:

1. In a centrally planned economy, the government controls all economic decisions, while in a market economy, decisions are driven by individual choices and market forces.

2. In a centrally planned economy, prices are determined by the government, whereas in a market economy, prices are determined by supply and demand.

3. Central planning economies often prioritize collective welfare over individual freedoms, while market economies focus on individual freedom and private property rights.

4. In a centrally planned economy, income redistribution is a key objective, whereas market economies rely on the profit motive and competition to drive income generation.

5. Centrally planned economies tend to have less flexibility and adaptability compared to market economies, which can respond more quickly to changing consumer preferences and market conditions.

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