A planned economy is a system in which the government, rather than the free market, determines what goods must be produced, how much must be produced, and what price is offered for sale. The command economy is a key characteristic of any communist society. Cuba, North Korea and the former Soviet Union are examples of countries that have command economies, while China maintained a controlled economy for decades before moving to a mixed economy that has communist and capitalist elements.
Also known as the command economy, planned economies are in contrast to free market economies, in which the prices of goods are services, and are set by invisible forces of supply and demand. A central principle of a free market economy is that the government does not intervene in the functioning of the market by setting prices, limiting production, or hindering competition within the private sector. In a command economy, there is no competition, as the central government controls all businesses.
Economies of command cannot efficiently allocate goods due to the problem of knowledge or the inability of the central planner to discern how much of a good should be produced. The shortages and surpluses are common consequences of command economies. The government is disconnected from the body of consumers, whose needs are more fluid than static. As a result, the entity that controls the means of production faces constant difficulty in responding to ever- changing demand.in various sectors in a timely manner. On the other hand, the central planner in a command economy sets prices strictly based on income needs, resulting in prices that are almost always inefficient with respect to production and demand.
On the other hand, a free market price system signals producers what to create and in what quantities, resulting in a much more efficient allocation of goods. Furthermore, the same body of consumers that fuels the demand for goods and services controls the means of production through private enterprise. As a result, there is no knowledge gap, and producers can respond to changing consumer demands much more efficiently.