Socialist Economy Problems
Socialist economy refers to that economy in which means of production and owned by the state. As against the capitalist economy in which central problems and solved through the functioning of price mechanism, in a socialist economy all decisions regarding production resources, allocation employment pricing etc. are centralized the hands of government or the Central Planning Authority. It is the Central Planning Authority decides about what to produce, how to produce and for whom to produce. In short, in a socialistic system, the price mechanism is replaced by economic planning.
1. What to produce and how to produce: the central planning authority collects detailed statistics about the available natural and made resources in the economy. It determines the national priorities keeping in view the present needs and future requirements of the country. Thereafter, in view of these priorities, it decided what commodities and in what quantities should be produced and then allocated resources accordingly.
2. How to produce: technique of production is also chosen by the Central Planning Authority keeping in view the plan priorities, availability and efficient utilization of resources and the net social benefit.
The central planning authority lays down the rules for the guidance of plant manager. Firstly, each manager should combine productive goods and services in such way that the average cost (AC) of producing a given output is the minimum. Secondly and thirdly, the manager should also see that industry produces exactly as much of commodity as can be sold at a price which equals the marginal cost. Thus under this method prices are equal to their marginal cost (price = MC).
Since goods are produced in anticipation of demand, it is accounting prices which are the basis of price determination. Thus, in turn, depends on the process of which are the bases of price determination. This, in turn, depends on the process of trail and the error which necessities marginal adjustments in prices from time to time.
3. For whom to produce: this problem is also solved by the central planning authority while making the decision for whom to produce, social preference is given weight age. In other words, production of those goods and services are given more weightage which are needed by the majority of the people over luxury items. The distribution of the production is done through a set of assigned prices fixed by the central planning authority. These are the prices at which the goods are sold. The prices of essential commodities are kept at a lower level so that the basic needs of all the people are satisfied. In case of shortages of scarce goods and services, the state can introduce rationing so that every individual can get an equal share. Thus from each according to his capacity and to each according to his work constitutes the fundamental basis of the distribution of income in a socialist economy.
4. Full employment: The problems of efficient and suitable utilization of resources are also tackled by the central planning authority. This authority formulates plan in such a manner as to provide work for everybody.
5. Economic growth: The central planning authorities after doing a comprehensive survey of the economic system as a whole not only allocate the resources of the economy among these different economic activities but also ensure that appropriate resources are mobilized and utilized efficiently to attain planned rate of economic growth. Thus problem of economic growth is also solved fully by central planning authority.
Thus, all central problems in a socialist economy are solved by the mechanism of planning and that is why these economies are turned
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