Question

4) Explain in your own words the Knowledge Problem. How would you use the insights of the Economic Calculation Problem to understand an event that you have observed in your life, an event from the news, or an event in your life?

Answer 1

The Knowledge Problem is the problem associated with assimilation to all the right kind of information for economic planning. It is observed that the information required are scattered not within the purview of a central authority that is involved in the planning process. This leads to inefficient economic planning which ultimately result in misallocation of resources. This also give rise to the Economic Calculation Problem, which is a criticism on the process of economic planning.
E.g of an event in my life that relates to Economic Calculation Problem - The govt. primary school nearby house has 200 students, mostly from poor families. An NGO came to distribute school bags to those students whose fathers work in unorganized sectors. This was the criteria they had come up with. But, at the end 5 students were deprived of the bags because their father had passed away. The decision criteria hadn’t factored-in children raised by single-mothers. This is a classic case of bad planning and rigid criteria. It would have been best had the NGO directly interacted with the students to understand their background and decided accordingly. That would have served the purpose well.
The above insight clearly highlights poor planning because of “knowledge problem”. The data related to no. of single mothers was not though off and not collected. Nobody highlighted the fact that the criteria of “father in unorganized sector” was narrow. Person working in an organized sector can be poor as well. Moreover, since, it was a govt. school in a not so good location, one could have expected majority of the students coming from poor backgrounds. This gap in knowledge led to poor planning and misallocation of resources. Few deserving students were left out. This happens in society as well due to misallocation of budget resources and inadequate budget allocation due to knowledge problem.