- 01 Sep 2014 12:55
#14459275
Infomation problem or the Economic calculation problem is the problem of how to distribute resources rationally in an economy.
In the free market the solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages and surpluses;
Unfortunately Socialism doesn’t have a solution to this problem
In socialist economies, if government owned or controlled the means of production, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.
which is why socialist planned economy has never work.. is there any way Overcome this problem?
In the free market the solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages and surpluses;
Unfortunately Socialism doesn’t have a solution to this problem
In socialist economies, if government owned or controlled the means of production, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.
which is why socialist planned economy has never work.. is there any way Overcome this problem?