Question

How does a command economic system answer the three economic questions?

Answer 1

Answer:

An economic system is any system of allocating scarce resources. Economic systems answer three basic questions: what will be produced, how will it be produced, and how will the output society produces be distributed?

There are two extremes of how these questions get answered. In command economies, decisions about both allocation of resources and allocation of production and consumption are decided by the government. In market economies, there is private ownership of resources—established though property rights—and the factors of production and consumption are all coordinated through markets. In a market system, resources are allocated to their most productive use through prices that are determined in markets. These prices act as a signal for buyers and sellers. Most economies are mixed economies that lie between these two extremes.

In either system, a rational agent would allocate resources and production using marginal analysis. In command economies, this is more difficult to do because without markets, prices fail at being an effective signal.

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