1.2: The allocation of resources

What is a resource allocation?

Refers to how an economy decides to use its limited resources to produce goods and services among consumers.

Market economy? Laissez faire?

Resources are allocated by market forces. Adam Smith and Friedrich Hayek (famous free market economists)

WHW?

What to produce? How to produce it? Whom to produce it to?

Advantages of Market Economy

More efficient, firms provide goods and services by consumer.

Arguably, more personal freedom.

The bureaucracy from the government is avoided

Disadvantages of Market Economy?

Ignores equality, benefiting those with wealth.

Overconsumption of demerit goods.

Planned Economy? (central planning)

Resources are allocated by the state guidance. Karl Marx argued for ‘the common ownership of the means of production’.

Advantage of Planned Economy?

Easier to coordinate resources in times of crisis.

Less pollution produced if government is involved.

Merit goods produced, which are good for you.

Inequality in society is reduced, and society focuses on welfare rather than profit.

Disadvantage of a planned economy?

Governments fail, as they may not be fully informed on what to produce.

They may not meet consumer needs.

It limits democracy and personal freedom.

Mixed economy?

Resources are allocated partly by the market forces and partly by the state.