In a command economy, a planning agency sets prices for various inputs and final
ID: 1125163 • Letter: I
Question
In a command economy, a planning agency sets prices for various inputs and final goods. In a market economy, supply and demand decide the prices of various goods. In both cases, there is a set of prices operating in the economy. Then why are market economies considered more efficient than planned economies?
A. The prices set by central planners reflect their very incomplete knowledge regarding the multitude of factors that determine the interests and decisions of economic agents.
B. The prices set by central planners tend to be inflexible, responding to changing conditions only when planners recognize that circumstances are changing and then figure out the significance of the underlying change.
C. The price mechanism utilized by market economies reflects all that is collectively known and thus ensures that economic agents make trades that are in their best interest and maximize social surplus.
D. All of the above.
Explanation / Answer
The market economies considered more efficient than planned economies because:
D. All of the above.
That means,
The prices set by central planners reflect their very incomplete knowledge regarding the multitude of factors that determine the interests and decisions of economic agents.
The prices set by central planners tend to be inflexible, responding to changing conditions only when planners recognize that circumstances are changing and then figure out the significance of the underlying change.
The price mechanism utilized by market economies reflects all that is collectively known and thus ensures that economic agents make trades that are in their best interest and maximize social surplus.
All of them are true.
The first two options are true because in case of command economy, it is impossible to have complete knowledge of a whole economy by a small group of central planners. And sometimes they even don't have correct idea to set a flexible price. Whereas, in case of a market economy, all the prices and amount of quantity is determinned by the buyers and sellers of the market.