The disadvantages of centrally planned economies include the inefficient distribution of resources and the suppression of economic freedom. Centrally planned economies are generally associated with dictatorial political states.Continue Reading
In a centrally planned economy, planners cannot accurately predict consumer preferences, surpluses and shortages, so they cannot efficiently allocate resources. This results in an abundance of goods that cannot be sold in some areas and a shortage of goods that are in high demand in others. In a free market economy, the allocation of scarce resources is dictated by the price system, so resources go where supply and demand dictate. One example of a centrally planned economy is the former Soviet Union, which operated as a centrally planned economy from the Bolshevik Revolution of 1917 until the 1991 fall of the Communist Party.
Central economic planning also stifles economic freedom, as citizens have no incentive to innovate or to take entrepreneurial risks. The desire to earn profit is a foundation of the free market system. Central planners suppress the profit motive by taking decisions from businessmen and transferring them to the government. Economist Adam Smith believed that society functioned best when the economy was guided by an "invisible hand" that rewarded personal economic freedom and risk taking. Central planning handcuffs the "invisible hand."Learn more about Economics
Economic theory states that economies of scale are achieved when more units of a good or service can be produced on a larger scale, with lower input costs. Dis-economies of scale also exist. These occur when production declines against a backdrop of rising input costs.Full Answer >
Mixed economies essentially create a balancing act between the private sector and government: these economies allow governments the opportunity to step in to correct market failures, but sometimes draw criticism for enabling too much governmental control. Mixed economies require participation and cooperation between the private sector (such as individual corporations and businesses) and the government. Ideally, these economies create strong, stable economies with minimal governmental interference. However, when the balance tips too far one way or the other, problems arise.Full Answer >
The most significant advantage of achieving economies of scale is a reduced cost per unit of production. Most other advantages stem from this primary benefit. A lower cost per unit allows a business to earn greater profit even when maintaining a similar price point. The company could pass on cost savings to customers by operating with a low-price strategy.Full Answer >
Protectionists argue that protectionism is effective because it protects national economies and standards of living, and it protects infant companies from unfair global competition. On the other hand, protectionism inhibits free trade and slows down the growth of the global economy, argues BBC News.Full Answer >