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The planned economic system is the one where ownership of resources is in the hands of the state alone. Decision taking on what to produce, how to produce and for whom to produce are also that of the state. There is a central planning authority that is responsible for taking these basic decisions. This economic system is also known as the state planned economy.
The central planning authority is a state which issues directives to firms indicating what they should produce, the quantities to be produced (giving target output to firms) and Carrie's out physical rationing of finished goods to consumers. It also takes stock of the country's resources and allocates them to firms according to what why have been assigned to produce. Workers in this organ are described as planners.
In this type of system, the mechanism which signals shortages of some commodities is often the existence of queues and empty shelves in markets and shops. On the other hand, commodities which the society does not desire will accumulate in stock.
No economy in the world today can properly be described as a complete state planned economy. In the real world, they exists command economy with some household choices e.g. in the modern command economies like Russia, China and Cuba, managers are allowed to set prices for some essential goods. Such prices are only helping to ration or share finished goods amongst many competing consumers. Prices in a command economy are known as shadow prices. They only help planners to have an idea about the desire or the taste of the people.
Characteristics of state planned economy
- Government owns and controls all the resources. This means there is not private ownership of factors of production. No individual owns and controls private Economic resources.
- Basic economic decisions are taken by the central authority. This means decision taken is centralized and is ensured by the central planners.
- The central planning authority fixes prices of essential goods.
- More equal distribution of wealth and income. The gap between the rich and the poor is highly reduced in the state planned economy. The state owns all resources and ensures a fair distribution of income and wealth.
- There is no profit motive. This means that firms are not out to make profit but no produce for the state or society as a whole. There is no self interest in production.
- There is physical rationing of scarce goods that have been produced.
For more details on advantages and disadvantages of the State planned economy, click READ MORE
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