The centrally planned economy is one in which the government makes decisions about what to produce, how to produce it, and who gets the final product. Contrary to that, in a market economy, individuals own property and are free to trade that property and earn from the property trade. The prices of goods are decided in a free market system where demand dictates what is done.

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 errors. However, in a market economy, people are motivated to use knowledge and information, and there are more incentives to make productive decisions. The USSR’s centralized economy did not reward people for hard work, so people did a lousy job. But because people 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, directs firms to produce those goods, and who gets the final product. For example, as our text points out, in a centrally planned economy all decisions about the use of property (for example, how to use its resources) are made by government officials.

In a market economy, production, distribution, pricing, and investment decisions are made by private owners to promote their own interests and the interests of their stakeholders (eg, customers, investors, employees). Again, using the example of property rights, a property owner can sell his land to another. Each party obtains the benefits of the transaction without having to share the benefits with the others.

The differences between market economies and centrally planned economies contributed to the demise of Russia. While Russian citizens watched the collapse of communist regimes in Central and Eastern Europe, nationalists in some of the Soviet republics believed that independence could be achieved. Contributing to this was Gorbachev’s unwillingness to use the military to maintain the territorial integrity of the Soviet Union.