What is Allocation?

In economics, the term allocation is understood to mean the distribution or allocation of scarce resources such as labor, capital and land for the production of goods and services. It is therefore also referred to as resource or factor allocation. An optimal allocation exists when limited resources of production are used for the best possible purpose.

In this lesson we explain the concept of allocation and the allocation problem associated with it. We go into the allocation in different economic systems and finally offer you the opportunity to check your knowledge with the help of our exercise questions.

  • Synonyms: resource allocation | Factor allocation
  • English: Resource allocation

Why is the allocation important?

According to, the allocation represents an elementary mechanism for the distribution of resources or production factors. A functioning allocation mechanism is therefore important when it comes to the question of whether the resources required for a company are available in the required amount.

Issues related to the allocation

Allocation problem

The central issue of the allocation problem is the question of how scarce goods can be used to achieve an efficient welfare outcome.

The factors of production available in an economy are always limited, but are confronted with unlimited individual needs. This leads to the question of which needs should be satisfied with the resources that are available.

A “Pareto-efficient allocation” is often mentioned as a solution. This means that it is not possible to make someone better without making another worse off. In order to ensure that the market functions as reliably as possible, the state must find a Pareto-optimal amount.

Allocation by the market

Usually resources are distributed through the market mechanism. If this is the case, no further coordination mechanisms are required and the customers always receive the goods they can afford. This is also known as allocation efficiency. The marginal costs of the provider correspond to the marginal utility of the customer.

If the quantity of goods changes, there is initially a decrease in welfare, since marginal costs and marginal utility no longer correspond to one another. A new equilibrium would then be established via the market mechanism.

In addition, the market mechanism promotes technical progress and has a motivational function. The prerequisite, however, is that there is functioning competition and that the market is able to optimally satisfy the needs of the customer.


Allocation through government regulation

If the allocation of certain resources and production factors is to be geared towards political goals, state regulation is required. The state intervenes in the market in order to achieve its goals and thereby influences or overrides the market mechanism.

The way in which the state intervenes can be used to distinguish between different forms of economic systems. If the allocation is made from a central point or with the help of central planning, a central or planned economy is assumed. In the case of a decentralized order, one speaks of a market economy.

Allocation in different economic systems

The differentiation between different economic systems can be made on the basis of prices, means of production and objectives. In a central economy, prices are fixed by the state. All means of production are in the hands of the state and the aim is to fulfill a certain plan. In a socialist market economy, there are both state-fixed and market prices – depending on which good it is.

The means of production are socialized and the objectives follow the income or profit principle. Only in a capitalist market economy do prices arise 100% through the market mechanism. The means of production are completely in private hands and the profit principle applies.