What Are Characteristics of a Centrally Planned Economy?

A centrally planned economy is characterized as an economic system in which the government dictates and regulates all areas of economic activity, such as trade, labor, distribution, production and health care. A centrally planned economy is also known as a command economy.

Centrally planned economies demand that citizens submit to the government for the benefit of the state. In a centrally planned economy, the government controls a nation’s supply, pricing and the manufacture and distribution of goods. The government owns all industrial production factories and all land. Government determines labor wages by basing them on the social benefit an occupation provides. The government decides the nation’s economic goals and direction. This economic model discourages citizens from seeking profit and gain. This prevents monopolies and consumer exploitation, but discourages individual incentive.

An example of a centrally planned economy was the Soviet Union. This type of economy is commonly indicative of socialism or communism. A disadvantage of a centrally planned economy is that goods are inefficiently produced, resulting in surpluses and shortages that the government is unable to control. This economic model is generally inefficient and most governments that had attempted to establish a centrally planned economy eventually transitioned into a different type, such as a free market system.