The market economy is considered to be an essential factor for the growth of trade and commerce in a country. While command economy, on the other hand, is essential for the overall development of the nation.
However, today many nations prefer to have a blend of market and command economy. This mixed economy facilitates the availability of common goods equally to the public. Simultaneously, there is fair competition in the market for manufacturing other commodities to uplift the trade and commerce activities.
Content: Market Economy vs Command Economy
- Comparison Chart
- Examples
- What is a Market Economy?
- Characteristics of Market Economy
- What is a Command Economy?
- Characteristics of Command Economy
- Advantages
- Disadvantages
- Summary
- Conclusion
Comparison Chart – Difference Between Market Economy and Command Economy
| Basis | Market Economy | Command Economy |
|---|---|---|
| Definition | Market economy is functional on the grounds of demand and supply. | Command economy is completely regulated and operated by the government. |
| Purpose | Profit Maximization | Macroeconomic and Social Welfare |
| Property Ownership | Private | Government or Collective |
| Production and Pricing Decision | Depends Upon Supply and Demand | Taken by Government |
| Competition | Perfect Competition | Government Monopoly |
| Government Intervention | Limited | Complete Control |
| Response to | Consumers’ Demand | Basic Necessities |
| Innovative Minds | Encouraged | Discouraged |
| Govern Market Failures | No | Yes |
| Regulate Economic Inequality | No | Yes |
| Employee Exploitation | Yes | No |
| Options for Consumers | Plenty | Limited |
xamples
One of the highly efficient market economies is that of the United States of America. Coming up to command economy, North Korea is still functioning in such a system.
What is a Market Economy?
A market economy is based on unorganized capitalism where the resource utilization, production and pricing depends upon the change in demand and supply of the products. It comprises of the private sector companies which function independently to maximize their returns.
Characteristics of Market Economy
A market economy allows trade activities to enhance the earnings of the business entities. Given below are the essential features of such an economic system:
Private Property: The asset ownership lies in the hands of individuals, who have the right to purchase, lease, sell or generate profit from it.
Personal Motive: The owners under this kind of economy, aims at incremental profits by purchasing raw material at a discounted price and selling products or services at a competitive price.
Limited Government Intervention: The government does not interrupt the production, pricing, employment and other decisions of the business. It only regulates unfair trade practices and manipulations done by owners.
Supply and Demand: The producer’s decision to dealing in a product or service is highly dependant upon the supply of raw material and its consumer demand.
Perfect Competition: The market doesn’t restrict the entry or exit of the business entities, thus ensuring a perfect competition among the producers.
Consumer Dominant: The consumers play a key role in shaping the market economy since they free to decide what to purchase and from where to purchase. Thus, impacting the production decisions of the owners.
What is a Command Economy?
A command economy is an organized system of socialism and communism where the government regulates production, resource allocation, pricing, distribution and other related activities to realize social or macroeconomic objectives. Here, the beneficiaries are the general public or the deprived section of the society.
Characteristics of Command Economy
Command economy stands on socialism, it is seen as a bureaucratic system.
Let us talk about the major attributes that distinguish this economic system from the other economies:
Government or Collective Property: To exercise a better control, the production premises and other means are either owned fully by the government or partially with the authorized private entity.
Macroeconomic Objective: The government is not self-centred. It plans to fulfil the societal needs including the availability of essential commodities, creating employment opportunities and reducing inequality, for the welfare of the country.
Central Economic Plan: Financial planning and budgeting are carried out by the central government in a command economy.
Centrally Planned Production: As per the requirements of the society, the government determines which essential commodity or service does it need to produce and in what quantity.
Government Monopoly: The government is the sole player and there is no scope of competition in a command economy. Thus, here the pricing of the products or services is also ascertained by the government.
People-Centric: The government plans to provide common goods to fulfil the necessities of the public. It is done to reduce inequality in society.
Advantages of Market Economy
The market economy is necessary for flourishing industries, trade and commerce, along with revenue generation in the country.
Following are the proven benefits of this economic system:
- Producers Take Production Decisions: In a market economy, the owner is liberal to decide the product or services he/she is willing to manufacture and sell.
- Consumers Make Buying Decisions: Since there is perfect competition in the market economy, the buyers can make a selection out of numerous options, according to their preference.
- Competitive Pricing: When the competition is high and the products or services are homogeneous, the owners need to set a favourable price for attracting consumers.
- Promotes Private Sector Companies: Such an economy helps the private business entities to flourish and maximize their earnings.
- Government Exercises Minimal Control: The central or state government allows complete liberty of business decision-making, to the private companies.
- Generates Tax Revenue for Government: The major contribution to the government treasury is made by private companies in the form of direct and indirect taxes.
Advantages of Command Economy
A command economy is significant for reaching the macroeconomic objectives. Now we will discuss some of its other pros:
- Social Welfare: The government runs a command economy to facilitate the availability of essentials to the underprivileged.
- Deals with Market Failures: The command economy helps to conquer situations like recession, economic crisis and other market failures.
- Employment Generation: The major reason for initiating such economic activities is to develop employment opportunities for the people.
- Reduces Economic Inequality: In the countries of economic discrimination, benefiting the poor becomes the government’s priority.
- Regulates Essential Goods and Services Distribution: The purpose behind the command economy is to ensure that the poor and needy are not deprived of necessary goods or services such as food and medical facilities.
Disadvantages of Market Economy
The biggest shortcoming of a market economy is its self-centred attribute. The following points unfold the other cons of this economic system:
- Ignores Society’s Weaker Section: The private companies do not function to offer charity to the underprivileged; instead they are only concerned about their earnings.
- Environmental Pollution: Also, such business entities are highly ignorant towards nature and the environment, clumsily discarding the industrial waste.
- Unfair Competition: The companies sometimes adopt unethical means of competing in the market such as unauthorized substitution, dumping, trademark infringement, etc.
- Exploit Employees: This is a serious concern in the market economy, the private companies take undue advantage of their workers by underpayment, long working hours and restricting growth.
- Inequality: The profit-oriented organizations of a market economy are focused on rich and ignorant towards the poor people, creating class discrimination.
- Fails to Deal with Recession: The private companies are inefficient in surmounting the adverse market or economic situations.
Disadvantages of Command Economy
A command economy is highly rigid and lacks proper research and planning. Given below are the various other pitfalls of this bureaucratic economic system:
- Dispirits Innovation: Government companies are inflexible to accept new means and dismay the creative minds.
- Black Economy Violations: In a command economy black marketing and other illegal activities are carried out parallelly by the government authorized sellers or manufacturers.
- Rationing: When goods, services or resources are scarce, the government has to restrict the distribution based on priority.
- Inefficient Planning: Because of limited research and inept planning the government based companies are unable to provide desired results.
- Uneven Production: The production of goods or services in a command economy either fails to meet the public demand due to scarce output or creates wastage because of excess produce.
Summary
The major dissimilarities between the market and command economy can be summarized as below:
When the market economy is a reflection of demand and supply prevailing in the market; the command economy is completely curbed by the government.
The prior is carried out of self-gains. While the latter is intended at social welfare and attainment of macroeconomic objectives.
In the market economy, property ownership remains with the private sector. However, the property and means of production are possessed by the government.
In the former, the private companies analyze the demand and supply to make production and pricing decisions. On the contrary, in the latter, the government independently determines the product or services to be manufactured or provided and its price.
The market economy can be usually considered as a perfect competition market. On the other hand, the command economy is far away from market competition and government monopoly can be seen here.
The companies operating in the former enjoys the freedom of production and pricing without any government intrusion. While the latter is wholly managed by the government itself.
A market economy responds to the demand or preference of the consumers. However, a command economy acknowledges the necessities and amenities of the society or community.
The prior is always open to ingenious ideas and new ways. On the contrary, the latter suppresses the innovative minds and rigid towards accepting a new perception.
The market economy is not prepared to handle and overcome market failures. Whereas, the command economy has the power to reduce the impact of the recession and other economic downturns over the country.
The prior is not concerned about economic inequality and social welfare. On the other hand, the latter constantly put in efforts to reduce economic inequality in the country.
The companies functional in market economy tries to extract the most out of their human resource by underpaying and making them work for long hours. While the government managed companies in a command economy ensure proper remuneration and maximum benefits to their employees.
For the consumers, there are ample alternatives available for every product or service in a market economy. However, the recipients of the products or services in a command economy have no choice available.
Conclusion
Instead of market or command economy, most of the countries have embraced a system of a mixed economy.
Under a mixed economy, the economic system is partially regulated by the government and partially by the supply and demand factors. Thus, a balance could be attained between capitalism and socialism, in such an economy.