In a centrally planned economy, the central government, rather than individual producers and consumers in markets, answers the key economic questions about production and consumption. The government owns the land and the capital. It controls where people will work and how much they will be paid. It decides what is produced and at what price things will be sold.

     The terms socialism and communism are associated with centrally controlled economies. Socialists attach great value to the goal of economic equity. They believe that economic equality is possible only if the public controls the economy. Socialist countries may be democracies. Communists share many of the goals of socialists, but believe that these goals can only achieved through violent revolution. In a communist society, individuals lack personal freedom.

     The former Soviet Union was an example of a communist nation where most economic and political power was controlled by the central government. Under the Soviet system all workers were guaranteed employment and income. Factories and farms had to meet production goals set by the government.

     Centrally planned economies try to promote faster economic growth and more equal distribution of goods and services. However, these systems almost always fall short of their goals. Without the incentive of self-interest, producers have no reason to produce more or better products. Consumers find it difficult to meet their needs or wants, having to accept poorly-made merchandise. In addition, individual freedoms are limited.