Allocative policy is used to:

• A. Increase production of all goods.
• B. To reallocate resources because there are some goods and services that the market fails to provide or fails to provide at socially optimal levels.
• C. Reduce government intervention.
• D. Maximise profits for firms.

Answer: (B)

Allocative policy is about directing resources toward the mix of goods and services that society values most. When markets fail to provide certain goods or provide them at levels that aren’t socially optimal—think public goods that the market won’t supply enough, or activities with external costs or benefits—the government steps in to reallocate resources. This helps move the economy toward a more socially desirable outcome.

In practice, this means using tools like public provision, subsidies, taxes, or regulations to boost or curb the supply of specific goods and services so the overall allocation reflects society’s preferences. For example, it supports public goods like defense or street lighting that markets alone wouldn’t adequately supply, and it uses measures to address externalities, such as pollution taxes or subsidies for education and vaccination.

The goal isn’t to increase production of everything, reduce government action, or maximize firm profits. It’s to ensure resources are used where they generate the greatest social benefit by correcting market failures.