A successful resource allocation mechanism is one that provides households with the goods and services they would choose for themselves if they knew all of the production recipes for transforming inputs into outputs and also the size of the economy's stock of primary inputs. The notion of a group of consumers deciding among themselves the best menu of commodities is an ambiguous one. Let us suppose, briefly, that it is sufficient for the mechanism to cater to the preferences of just one consumer. We might call this consumer a dictator. Let us see what difficulties the dictator would have in designing a resource allocation mechanism to suit his preferences. Then we will see what additional difficulties arise when an economy is required to cater to individual wants generally.

The limitations implied by production recipes, or techniques, and by the stock of primary inputs will constrain the dictator's choice. But no individual can be expected to know all of the recipes and all of the details concerning input availability. Each important fact relevant to production is known by someone, but no one individual, even if he is a dictator, is privy to even a substantial fraction of the relevant information. In other words, knowledge is dispersed. The key to the successful operation of a resource allocation mechanism is its ability to organize and exploit essential information by means of a communication process.