Centrally planned economy is one where the government makes decisions about what to produce, how to produce, and who gets the final product. Opposite of that, in a market economy, Individuals own property and are free to trade such property and gain from trading property. Prices for goods are decided in a free market system where demand dictates what is made.
This had everything to do with the demise of the Soviet Union. Some problems in a planned economy such as shortages, surpluses, and other production mistakes. However, in a market economy, people are motivated to use knowledge and information, and there exists more incentives for productive decisions. The centralized economy of the USSR failed to reward individuals for hard work, so people did lousy work. But because individuals are rewarded for their hard work in a market economy, superior products are made.
Centrally planned economies are run by the government. In this model, the government decides what should be produced, mandates enterprises to produce those goods and who obtains the final output. For example, as our text points out, in a centrally planned economy all decisions about the use of property (e.g., how to use its resources) are made by government officials.
In a market economy, production, distribution, pricing, and investment decisions are made by the private owners to further their own interests and the interests of their stakeholders (e.g., customers, investors, employees). Again, using the example of property rights, a property owner can sell his/her land to another. Each party reaps the benefit(s) of the transaction without having to share the benefits with others.
The differences between market economies and central planning economies did contribute to the demise of Russia. As Russian citizens watched the collapse of the communist regimes in Central and Eastern Europe, nationalists in some of the Soviet republics believed that independence was obtainable. Contributing to this was Gorbachev’s unwillingness to use the military to maintain the territorial integrity of the Soviet Union.
Source by Nathan E Peterson