AP® Microeconomics

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The Incentive Problem


Many Economists point to what was known as the “incentive problem” under communist central planning that was a leading cause of the demise of such systems worldwide.

This concept referred to fact that


workers could not personally gain by responding to market failures by introducing new products or improved production techniques.


central planning boards had to choose the mix of resources that would be allocated to each production sector.


as a result of increased investment by private enterprise, more consumption took place.


new technological advances were not always prevalent or available for use in command systems.


because outputs of one industry serve as inputs of another, the failure of any single industry to meet inflexible, and sometimes arbitrary, government-set quotas created a chain reaction of negative effects.