The What? 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 specific goods to produce. Should society produce hammocks or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships?
The two primary methods used to answer the What? 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 What? question by directing resources to the production of goods with higher prices. But prices are higher because the goods provide greater satisfaction and are more valued by society.
Suppose, for example, that Chip Merthington, a newly enrolled college freshman at the Ambling Institute of Technology, is pondering the pursuit of a two equally appealing and spiritually fulfilling careers--public school teacher or certified public accountant. Chip is equally willing to spend the rest of his life in either occupation. However, because the accounting career is expected to generate twice the annual salary of the teaching alternative, Chip opts for accounting over teaching.
How does this illustrate resource allocation and the What? question. The higher price paid for accountants induces Chip to allocate his labor resources to the production of accounting services. But why is the price higher? Presumably it is higher because society derives greater satisfaction and is thus willing to pay more. The end result is that more resources (Chip) are allocated to accounting and fewer are allocated to teaching.
GovernmentGovernments address the What? question by dictating that some goods are produced and others are 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 Shady Valley city commission, duly elected by the citizens of Shady Valley, decides that people should consume larger quantities of frozen yogurt and smaller amounts of ice cream.
One way to achieve this end is to pass a law that every hot fudge sundae sold in Shady Valley must be prepared with frozen yogurt. Anyone violating this edict is subject to punishment by jail time and a sizeable fine. How does this address the What? question? In all likelihood, hot fudge sundae vendors seek to avoid punishment by preparing frozen yogurt based treats, resulting in more frozen yogurt production and less ice cream production.
Alternatively, the Shady Valley government can use a portion of tax revenues to purchase large amounts of frozen yogurt, which it then distributes without charge every Saturday morning to children, elderly, working mothers, and unemployed. How does this address the What? question? Prompted by regular government purchases, frozen yogurt producers undoubtedly increase their production. In addition, ice cream producers likely convert their facilities from ice cream to frozen yogurt. The result is more frozen yogurt production and less ice cream production.
WHAT?, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: May 28, 2018].