The centrally planned economy is one in which the government makes decisions about what to produce, how to produce, and who gets the end product. Contrary to that, in a market economy, individuals own property and are free to trade in such goods and make a profit from the trade in goods. The prices of goods are decided in a free market system where demand dictates what is manufactured.
This had a lot 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 for productive decisions. The centralized economy of the USSR did not reward people for hard work, so people did lousy work. 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, forces companies 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 advance their own interests and the interests of their stakeholders (eg, customers, investors, employees). Again, using the example of property rights, one owner can sell his land to another. Each party obtains the benefits of the transaction without having to share the benefits with the others.
Differences between market economies and centrally planned economies contributed to Russia’s demise. 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 obtained. This was contributed by Gorbachev’s unwillingness to use the army to maintain the territorial integrity of the Soviet Union.