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What are the advantages and disadvantages of trying to plan and predict what people will demand and allocating a country's resources on that basis?
Wiki User
∙ 15y ago
1. Advantages If relatively weak conditions are satisfied, then whatever allocation of resources results from the use of the price mechanism cannot be improved upon for any person in the country without harming someone else. The main conditions required are: 1. Either a finite number of agents or goods. 2. No externalities. That is, the consumption of one person should not harm or benefit anyone else. 3. No matter how much a person is consuming, they must be able to be made slightly happier by consuming a bit more of something. This result is the First Fundamental Theorem of Welfare Economics. 2. DisadvantagesAs it is only the government that can interfere with the operation of the price mechanism, a good place to start is where and why the government does this now. BTW 'wheat' is NOT a natural resource on the USA .
The government knows that a large oversupply of a product, such as wheat, will cause the price of wheat to fall so it pays farmers not to grow wheat. The farmers, who would have grown wheat, use the money to sow other crops; the economy gets other goods it requires and the price of wheat stays 'high'. Disadvantage? Prices remain high however they don't skyrocket if and when supply falls.
Wiki User
∙ 15y ago
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