Strengths and weaknesses of the three basic types of economies Imagine you are a
ID: 1131651 • Letter: S
Question
Strengths and weaknesses of the three basic types of economies
Imagine you are a consultant who has been asked to summarize the strengths and weaknesses of Directavia, a nation with a pure command economy.
Which of the following would you include in your report as weaknesses of Directavia's economy? Check all that apply.
The economy cannot quickly change the type of goods being produced to meet new priorities.
The economy experiences persistent shortages and surpluses.
Many goods are available only through a black market.
The price-setting mechanism is particularly vulnerable to the mispricing of goods for which there are externalities.
Explanation / Answer
Given that Directavia is a pure command economy, the Government of Directative controls the the means production and centrally determines what goods should be produced, how much they should be produced and also the price at which these goods should be sold. Thus, the investments and incomes are dictated by the Government.
In the pure command economy of Directavia, the Government can quickly mobilize economic resources for meeting national new national priorities and social objectives. Hence, the statement given above that the economy cannot quickly change the type of goods being produced to meet new priorities may not apply fully.
The needs of the consumers are not static and change rapidly. Since, in the pure command economy of Directavia, the Government controls the means of production, it is often unconnected from consumer needs and may not respond in time to meet the ever-changing demands of conumers. This has the unintended consequences of creating shortages and surpluses which are very common in a command economy. Hence, the statement that the economy experiences persistent shortages and surpluses applies to a pure command economy.
Because of restrictions by the government, some products and services are not offered in the command economy, so they would be offered on black markets at least in the short time till the production gets adjusted to the new consumer demands. However, it is not that that many goods in a comand are available only through a black market Hence, the statement that many goods are available only through a black market tends to apply for the short term but not for the long-term.
However, in a command economy, the Government centrally determines what pricing of the goods shoud be. Thus, in such a case, prices do not reflect the efficient allocation of resources as they are not market determined. Hence, the statement the price-setting mechanism is particularly vulnerable to the mispricing of goods for which there are externalities applies.