Which of the following best explains the coordination problem in economics?

• A. It occurs when there is perfect information and all markets clear simultaneously.
• B. It refers to the situation where consumers and producers have identical preferences.
• C. It arises when individual decision-makers fail to align their actions, leading to inefficient allocation of resources.
• D. It is caused by government intervention that always improves market outcomes.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of the coordination problem in economics. It refers to situations where individual decision-makers (consumers, producers, firms) do not coordinate their actions effectively, which can lead to inefficiencies in resource allocation.
2. Step 2: Recognize that perfect information and simultaneous market clearing typically help markets function efficiently, so the coordination problem is not associated with these conditions.
3. Step 3: Note that identical preferences among consumers and producers would simplify coordination rather than cause problems, so this is not the correct explanation.
4. Step 4: Understand that government intervention can sometimes improve or worsen market outcomes, but the coordination problem itself is not defined as always caused by government intervention.
5. Step 5: Conclude that the best explanation is that the coordination problem arises when individual decision-makers fail to align their actions, leading to inefficient allocation of resources.