--- title: Command Economy | What It Is, How It Works, Pros & Cons description: The term “command economy” is often used to describe a type of economic system, but what does it mean? Find out what it is and how it compares. image: https://www.carboncollectiveinvesting.com/hubfs/Command_Economy.png --- [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo-white.4f6047d4.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo.53b28bee.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) **[Home](https://www.carboncollectiveinvesting.com/) > [Sustainable Investing](https://www.carboncollectiveinvesting.com/sustainable-investing) >** Command Economy # Command Economy ![](https://www.carboncollectiveinvesting.com/hubfs/Brooke%20Tomasetti.png) Written by Brooke Tomasetti | Reviewed by [Subject Matter Experts](https://www.carboncollectiveinvesting.com/subject-matter-experts) Updated on October 1, 2024 Fact Checked Why Trust Carbon Collective? ### Table of Contents ## **What Is a Command Economy?** A command economy is a type of economic system in which the government is the sole controller of most aspects of the economy. This includes setting prices, allocating resources, and dictating production levels. In a command economy, the government is able to control economic outcomes directly. This can be done by issuing directives to businesses. For example, the government may tell a steel manufacturer to produce more steel, even if there is insufficient demand. Or, the government may set prices that are different from what would occur in a [market economy](https://www.carboncollectiveinvesting.com/sustainable-investing/free-market-economy?_ga=2.125174658.968567958.1657721608-53287470.1657721608). This can distort the signals that businesses use to make decisions about what to produce and how much to produce. ## **What Is the Purpose of a Command Economy?** The purpose of a command economy is to [ensure that the government can meet its economic goals](https://www.thestreet.com/politics/command-economy-14653147). These goals may include ensuring that there is full employment, controlling inflation, or developing specific industries. This means that a command economy is not necessarily about maximizing economic output. Instead, it is about achieving specific goals that the government has set. ## **How Does a Command Economy Work?** In a command economy, the government holds all the power. This means that it can issue directives to businesses, telling them what to produce and how much to produce. The government can also control prices. This allows it to ensure that goods are available at a low price, or those specific goods are available in short supply. In addition, the government can allocate resources as it sees fit. This means that it can direct businesses to invest in certain sectors of the economy or to use specific resources. The government can also control the level of production. This allows it to ensure that there is not too much or too little of a particular good. ## **What Are the Advantages and Disadvantages of a Command Economy?** The advantages of a command economy are: - The government can ensure that there is full employment. - The government can control inflation. - The government can direct businesses to invest in certain sectors of the economy. - The government can develop specific industries. The disadvantages of a command economy are: - There is less economic freedom. - Businesses do not have the freedom to make decisions about what to produce and how much to produce. - The government can distort pricing signals, which can lead to inefficiencies in the economy. - The level of production is not always responsive to market demand. - The government can be wasteful with resources. ## **![Advantages_and_Disadvantages_of_a_Command_Economy](https://www.carboncollectiveinvesting.com/hs-fs/hubfs/Advantages_and_Disadvantages_of_a_Command_Economy.png?width=1920&name=Advantages_and_Disadvantages_of_a_Command_Economy.png)** ## **How Does Pricing Signal Information in a Command Economy?** In a command economy, prices are not determined by [supply and demand](https://www.imf.org/external/pubs/ft/fandd/basics/suppdem.htm). Instead, they are set by the government. This can make it difficult for businesses to make informed decisions about what to produce and how much to produce. For example, if the government sets a price for steel that is higher than the market price, businesses will have less incentive to produce steel. This can lead to shortages of steel in the market. Alternatively, if the government sets a lower price for steel than the market price, businesses will have more incentive to produce steel. This can lead to overproduction of steel and shortages of other goods. ## **How Does the Performance of a Command Economy Compare to a Market Economy?** There is no one-size-fits-all answer to this question. The performance of a command economy will vary depending on the specific goals that the government is trying to achieve. However, a command economy is likely to be less efficient than a market economy. This is because the government cannot respond to changes in supply and demand as quickly as businesses can in a market economy. Additionally, businesses in a market economy are motivated by profit. This means that they will produce goods that people are willing to buy at a price that covers the cost of production and allows for a profit. In a command economy, businesses may produce goods that people do not want or that are not profitable. ## **What Is the Difference Between a Command Economy and a Socialist Economy?** A command economy is different from a [socialist economy](https://www.investopedia.com/articles/investing/082014/what-exactly-socialist-economy.asp) in several ways. First, the government controls a command economy, while the workers control a socialist economy. Second, in a command economy, businesses are directed to produce specific goods, while in a socialist economy businesses are free to produce whatever they want. Third, prices are set by the government in a command economy, while prices are determined by supply and demand in a socialist economy. Finally, a command economy aims to achieve specific economic goals, while the goal of a socialist economy is to create a more equal society. ## **Do Command Economies Still Exist?** Yes, command economies still exist in some countries. However, they are becoming less common as more countries move to a market economy. Examples of countries with a command economy include Cuba and North Korea. ## **The Bottom Line** In a command economy, prices are set by the government, and businesses are directed to produce specific goods. The performance of a command economy is likely to be less efficient than a market economy. Command economies still exist in some countries, but they are becoming less common. Examples of countries with a command economy include Cuba and North Korea. ## **FAQs** ### **1. What is the purpose of a command economy?** A command economy aims to achieve specific economic goals, such as maximizing production or ensuring that all citizens have access to essential goods. ### **2. How does pricing signal information in a command economy?** In a command economy, prices are not determined by supply and demand. Instead, they are set by the government. ### **3. How does the performance of a command economy compare to a market economy?** There is no one-size-fits-all answer to this question. However, in general, a command economy is likely to be less efficient than a market economy. ### **4. How is a command economy different from a socialist economy?** The government controls a command economy, while the workers control a socialist economy. ### **5. Is a command economy the same as a centrally planned economy?** No, a command economy is not the same as a centrally planned economy. 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