Question

Differences betweenmarket economy and command economy

Answer 1

Market economies and command economies occupy two polar extremes in the organization of economic activity. The primary differences lie in the division of labor or factors of production and the mechanisms that determine prices. The activity in a market economy is unplanned; it is not organized by any central authority but is determined by the supply and demand of goods and services. The United States, England, and Japan are all examples of market economies, as are most developed, democratic nations. Alternatively, a command economy is organized by a centralized government which owns most, if not all businesses, and whose officials direct all the factors of production. China, North Korea, and the former Soviet Union are all examples of command economies. 

Answer 2

In a command economy, the state owns all the factors of production (land, labor, and capital). Resources are allocated based on need instead of efficiency. In a market economy, there is no government intervention, and it operates on the assumption that efficiency will be achieved through rational self-interest.

Command economies and market economies are the same in that both fail in the real world. Command economies fail because of massive inefficiencies, which arise because of a lack of incentive to be productive. Market economies fail because of market failure, when the free market fails to allocate resources efficiently due to externalities.