Demise of the Command Systems

Question 1

What happened?

Answer 1

Command systems in the Soviet Union, Eastern Europe, and China eventually gave way to market systems.

Question 2

What were the two main problems?

Answer 2

1. ) Coordination problem

2. ) Incentive problem

Question 3

Elaborate on the coordination problem.

Answer 3

It was difficult for central planners to effectively coordinate the allocation of resources and satisfaction of wants of millions of consumers, resources, suppliers, and businesses.

1. ) If even one industry failed to meet production targets set by the government, it could disrupt production and resource allocation throughout the system.
2. ) larger planned economies faced even greater difficulties because the greater number and complexity of allocation decisions to be made
3. ) without market signals (i.e. prices) it was difficult to measure success. Even if quantitative productions were met, ambiguities in the targets led to preserve outcomes in terms of poor quality, excessive costs, and the wrong mix of goods.

Question 4

Elaborate on the incentive problem.

Answer 4

There was little incentive to innovate, contain costs, or otherwise improve the quantity and quality of goods and services

BECAUSE

Central planning solely determined what and how much would be produced, and how much suppliers would receive