The coordination problem in centrally planned economies refers to the idea that:

• A. it is difficult for a central authority to efficiently allocate resources among industries and firms due to lack of information and incentives.
• B. competition among firms automatically ensures productive efficiency.
• C. private ownership of resources leads to unequal distribution of income.
• D. market prices always reflect the true social value of goods and services.

Answer: (A)

Verified step by step guidance

1. Understand the concept of the coordination problem in centrally planned economies: it arises because a central authority must decide how to allocate resources without the benefit of decentralized information that markets provide.
2. Recognize that in a market economy, prices serve as signals that convey information about scarcity and consumer preferences, helping coordinate production and consumption decisions efficiently.
3. In a centrally planned economy, the absence of market prices means the central planner lacks the necessary information to allocate resources optimally among industries and firms.
4. Additionally, without market competition and profit incentives, firms may lack motivation to be efficient or innovative, further complicating resource allocation.
5. Therefore, the coordination problem highlights the difficulty of achieving productive efficiency in centrally planned economies due to information and incentive problems faced by the central authority.