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Economic Theory

3) central planning: most of the economic policy decisions will be
taken by a centralized planning authority. Each and every sector of the
economy will be directed by well designed planning;
4) no market forces: in a centralized planned system of development,

market forces have only a limited role to play. Production, commodity and
factor prices, consumption and distribution will be governed by

development planning with welfare motive;
Merits of Socialist Economy are:
1) efficient use of resources: the resources are utilized efficiently to
produce socially useful goods without taking the profit margin into

account. Production is increased by avoiding wastes of competition;
2) economic stability: economy is free from business fluctuations.
Government plans well and everything is well coordinated to avoid over-

production or unemployment. There is stability because the production and
consumption of goods and services are well regulated;
3) maximization of social welfare: all citizens work for the welfare of
the State. Everybody receives his or her remuneration. The State

concentrates on the production of basic necessaries instead of luxury
goods. The State provides free education, cheap and congenial housing,
public health amenities and social security for the people;

4) absence of monopoly: the elements of corporation and monopoly
are eliminated since there is absence of private ownership. The state is a
monopoly but produces quality goods at reasonable price;
5) basic needs are met: In socialist economies, basic human needs like

water, education, health, social security, etc., are provided. Human
development is more in socialist countries;

6) no extreme inequality: As social welfare is the ultimate goal, there
is no concentration of wealth. Extreme inequality is prevented in socialist
system.
Demerits of Socialism are:

1) bureaucratic expansion: a socialist economy is operated under a
centralized command and control system. People here work out of fear of
higher authorities. It does not give any initiative for the people to work

hard;
2) no Freedom: there is no freedom of occupation. Allocation of
factors of production is not done rationally. Jobs are provided by the State.
Place of work is also provided by the State. The consumer’s choice is very

limited;

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