The How? question of allocation arises because society faces the fundamental problem of scarcity--wants and needs are unlimited, but resources are limited. Because society lacks sufficient resources to produce every good that every person desires, society must decide which resources to use in the production of a good or service. Does society fabricate jogging shoes out of leather or plastic? Does it produce automobiles using high-tech robots or manual labor? Does it educate college students with professors or graduate instructors.
The two primary methods used to answer the How? question are markets and government. Markets employ voluntary exchanges among buyers and sellers. Governments make use of laws, rules, and regulations that are involuntarily imposed on members of society.
MarketsMarkets address the How? question by using resources with lower prices. But prices are lower because resources have lower opportunity cost, which means society gives up less valuable production.
Suppose, for example, that The Wacky Willy Company is organizing the production of a new line of Wacky Willy Stuffed Amigos. Company decision makers are considering two alternatives--a computerized, high-tech production facility managed by a dozen highly trained computer programmers or a low-tech factory employing hundreds of semi-skilled workers and very little equipment. The Wacky Willy Company can achieve equal production from either alternative. However, because the wage paid to labor is relatively high compared to the cost of equipment, The Wacky Willy Company opts for high-tech production over low-tech.
How does this illustrate resource allocation and the How? question. The higher price of labor induces The Wacky Willy Company to produce Stuffed Amigos with relatively more equipment and relatively less labor. But why is the price higher? Presumably it is higher because labor foregoes more valuable alternatives. The end result is that less expensive resources (equipment) are used, making production more efficient and leading to lower prices.
GovernmentGovernments address the How? question by dictating how resources are used to produce and others will not. This can be accomplished either directly through legal mandates (laws, rules, and regulations) or indirectly through the collection and spending of tax revenues.
Suppose, for example, that the Board of Regents of the Ambling Institute of Technology, a comprehensive state-supported university of higher learning, decides that the production of education services relies too heavily on human instruction and not enough on computer technology.
One way to alter the production of education services at the Institute is to pass a rule that seventy-five percent of all exam questions must be based on material available through computer websites. Any instructor violating this edict is fired (if untenured) or receives lower raises (if tenured). How does this address the How? question? In all likelihood, instructors seek to avoid punishment by producing education with more computer technology and less in-class human lectures.
Alternatively, the State Board of Regents could use a portion of tax revenues received from the state government to purchase computers and software, to hire computer technicians, and to fund programs that develop computer-based instruction. How does this address the How? question? Prompted by the redirection of tax revenues toward computer technology, instructors are likely to produce education using more computer technology and less human interaction.
HOW?, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: January 20, 2019].