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Economic Systems and Market Failure: Question 6

Syllabus 2.8, 2.9, 2.10

Multiple choice 1 mark

In the nation of Vantrell, a central planning ministry decides each year how much wheat, steel and cloth every state-owned factory and farm will produce, sets the wages paid to workers in each industry, and distributes the goods produced through state-run shops at prices the ministry itself fixes in advance.

Which type of economic system does Vantrell operate?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall what a planned economic system means

In a planned (command) economic system, a central authority, typically a government ministry or planning agency, decides directly what is produced, how it is produced, and who receives it. Output targets, resource allocation and often prices are set by this authority rather than being left to respond to the independent choices of consumers and producers through a market. The price mechanism plays little or no role in allocating resources.

Step 2: Test each option against Vantrell’s scenario

  • Option A matches the description closely: a single ministry sets output targets for wheat, steel and cloth, fixes wages, and fixes the prices at which goods are distributed. Every stage of the what/how/for whom decision is made centrally, not through supply and demand.
  • Option B does not fit: in a market system, prices would be free to rise and fall in response to demand and supply, but here the ministry fixes both quantities and prices in advance, and government involvement is total rather than minimal.
  • Option C does not fit either: a mixed economy still has a substantial free market operating alongside government intervention, but Vantrell’s scenario describes a central authority making essentially every production and distribution decision, with no independent market forces described.
  • Option D does not fit: Vantrell’s state-run shops still use money and posted prices to distribute goods; the scenario concerns who sets output and prices (a planning ministry), not the absence of money.

Step 3: Select the option that matches

Only option A correctly identifies Vantrell as operating a planned (command) economic system.

Final answer

Vantrell operates a planned (command) economic system, option A: a central ministry, not the price mechanism, decides what, how and for whom to produce.