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Economics explained


Economic systems

The planned economy Pros and Cons

The planned economy Pros and Cons

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With central planning, the government could take an overall view of the economy.

It could direct the nation’s resources in accordance with specific national goals. For example, Unemployment could be largely avoided if the government carefully planned the allocation of labour in accordance with production requirements and labour skills

Economies of scale

Large state monopolies can achieve huge cost savings known as economies of scale . This is achieved by operating on a very large scale, such as a national supplier of electricity or postal services

National income could be distributed more equally or in accordance with needs.

A planned economic system enables basic needs to be met for everyone in society. For example, everyone in society has access to education, health care and employment.

The social repercussions of production and consumption (e.g. the effects on the environment) could be taken into account, provided the government was able to predict these effects and chose to take them into account.



Government intervention involves administrative costs. The more wide-reaching and detailed the intervention, the greater the number of people and material resources that will be involved. These resources may be used wastefully.

Lack of economic freedom

Complete state control over resource allocation would involve a considerable loss of individual liberty. As the state plans all production decisions, individuals do not have economic freedom to choose from competing goods and services. Workers would have no choice where to work.

Lack of incentives

As resources, jobs, goods and services are determined (planned) by the government, there is a lack of incentive to be innovative. The absence of a profit motive for firms means there is less of an incentive to produce more goods and services or to produce these at a higher quality.


If there is no system of prices, or if prices are set arbitrarily by the state, planning is likely to involve the inefficient use of resources. It is argued that planned economies cannot detect consumer preferences resulting in shortages and surpluses

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