collective decision making

The major alternative to market organization is collective decision making, whereby the government, through the political process, makes decisions for buyers and sellers in an attempt to solve the basic economic questions facing the economy. The government may maintain private ownership, but uses taxes, subsidies, and regulations to resolve the basic economic questions. Alternatively, an economic system in which the government also owns the income-producing assets (machines, buildings, and land) and directly determines what goods will be produced is called socialism. Either way, individual planning and decisions are replaced by central planning and decisions made through the political process. These decisions can be made by a single dictator or a group of experts, or through democratic voting. Political rather than market forces direct the economy, and government officials and planning boards hand down decisions to expand or contract the output of education, medical services, automobiles, electricity, steel, consumer durables, and thousands of other commodities.
This is not to say that the preferences of individuals carry no weight. If the government officials and central planners are influenced by the democratic process, they must consider how their actions will influence their reelection prospects. That means they will listen to the voices of the voters to win over a majority of them. Otherwise, like the firm in a market economy that produces a product that consumers do not want, their tenure of service is likely to be short. However, under central planning the indirect exit method of communicating is much more difficult. Although people can use the direct or voice method to communicate their preferences by lobbying government officials or casting votes in an election, they generally cannot use the indirect exit option because they cannot refuse to pay taxes or to quit purchasing a good or service that is provided by government. For example, families who send their children to private school must continue to pay the same amount in taxes to support the public school system as they would if they kept their child In public school. Oftentimes, people “vote with their feet” and leave one political jurisdiction to move to another. This is frequently seen when people move to better school districts. It is much easier, however, to move between school districts than between states or nations.
In summary, both market organization and central planning face the same basic economic questions. A basic difference between them is that the market system, with its exit option, allows for a wider variety of products and creates constant competition among suppliers, whereas the central planning system, in a democracy, responds primarily to the votes of the majority. In varying degrees, all economies use a combination of both of these methods of economic organization. Even predominantly market economies will still use taxes, subsidies, and some government ownership to direct and control resources. Similarly, predominantly socialist economies will, to some degree, use markets to allocate certain goods and services.