Explain Underdevelopment as coordination failure with suitable example
Answers
In economics, coordination failure is a concept that can explain recessions through the failure of firms and other price setters to coordinate.[1] In an economic system with multiple equilibria, coordination failure occurs when a group of firms could achieve a more desirable equilibrium but fail to because they do not coordinate their decision making.[2] Coordination failure can result in a self-fulfilling prophecy.[3] For example, if one firm decides a recession is imminent and fires its workers, other firms might lose demand from the lay-offs and respond by firing their own workers leading to a recession at a new equilibrium. Coordination failure can also be associated with sunspot equilibria (where equilibria are the result of variables that do not have any real impact on fundamentals) and animal spirits.
Coordination failure can lead to an underemployment equilibrium.Coordination failure also implies that fiscal policy can mitigate the effects of recessions, or even avoid them entirely, by moving the economy to a higher-output equilibrium.