Definition
Allocation is how a society decides what gets produced, how it gets produced, and who receives the output. Because resources — land, labor, capital, and time — are finite while wants are effectively unlimited, every economy must answer these questions, and the answers it gives constitute its allocation mechanism.
The core economic question is not whether to allocate but how. Markets allocate through prices and voluntary exchange; command economies allocate through central plans; traditions, queues, lotteries, and rationing are also allocation systems, each with distinct trade-offs.
Why it matters
How it works
In a market system, prices act as signals: a rising price tells producers to supply more and tells consumers to economize, steering resources toward where they are most wanted. This decentralized coordination requires no single authority to gather information, since each actor responds only to prices.
Allocation is judged on two dimensions. Allocative efficiency means resources flow to their most valued uses; distributive fairness asks whether the resulting pattern is just. The two often conflict, which is why allocation debates sit at the heart of economic policy.