The central planning approach fails to achieve an optimal resource allocation because of information and incentives problems.

Question

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The central planning approach involves a central authority making decisions on resource allocation, which can lead to information problems as the central authority does not have perfect information about the needs and preferences of individuals and firms. Additionally, incentives can be skewed because decision-makers may not be financially or politically motivated to make efficient resource allocation decisions. These problems can result in suboptimal resource allocation decisions.

The Central Planning Approach Fails to Achieve an Optimal Resource