The incentive problem describes a situation faced in command economies in which producers have no reason to adjust production in response to shortages and surpluses in the economy.
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The command economy is seen as a kind of a system where the factors of production are said to be publicly owned as well as the economic activity is known to be controlled by a key authority that gives a form of quantitative production aims and shares raw materials to the productive firm.
Therefore, The incentive problem describes a situation faced in command economies in which producers have no reason to adjust production in response to shortages and surpluses in the economy.
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