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Q2) Discuss The View That The Market Economy Is Always Preferable To A Planned Economy Because of The Existence of The Price Mechanism

The document discusses the view that market economies are preferable to planned economies due to the existence of price mechanisms. It explains that market economies allow prices to be determined by supply and demand, while planned economies involve centralized economic planning. The price mechanism in a market economy ensures efficient allocation of resources by bringing supply and demand into balance. In contrast, price controls in a planned economy can lead to misallocation of resources and reduce overall welfare. Therefore, the document argues that allowing markets to operate freely without government intervention results in the most efficient outcome.

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148 views1 page

Q2) Discuss The View That The Market Economy Is Always Preferable To A Planned Economy Because of The Existence of The Price Mechanism

The document discusses the view that market economies are preferable to planned economies due to the existence of price mechanisms. It explains that market economies allow prices to be determined by supply and demand, while planned economies involve centralized economic planning. The price mechanism in a market economy ensures efficient allocation of resources by bringing supply and demand into balance. In contrast, price controls in a planned economy can lead to misallocation of resources and reduce overall welfare. Therefore, the document argues that allowing markets to operate freely without government intervention results in the most efficient outcome.

Uploaded by

Orochi Scorpion
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Q2.

Discuss the view that the market economy is always preferable to a planned
economy because of the existence of the price mechanism [12]

Every economic system is based on a different philosophical stand than the


others. These differences are caused by the different responses that each
economy has to the problem of scarcity. A planned economy is an economic
system in which economic decisions are made by centralized planners, who
determine what sorts of goods and services to produce how they are to be
priced, and allocated. A free market economy is an economy in which the
allocation for resources is determined only by their supply and the demand for
them.

Price is the most critical factor that causes efficient allocation of resources in the
economy. The equilibrium level of price is decided where demand and supply
forces are equal. Or in other words, the price makes equal the demand and supply.
There is neither surplus nor shortage in the market. Since there is no excess or
shortage of supply or demand in a market, the outcome is efficient, the goods and
services are allocated based on three factors, price, willingness to purchase and
buying power, and with these factors in place, the resources are allocated to the
people based on their needs and wants. Whereas, there is a contrasting difference
in the command economy where government intervention leads market to an
inefficient outcome by means of price control. This means that resources are not
allocated but distributed based on the government’s assessment and planning and
hence this leads to a misallocation of resources where the total surplus of market
fall largely than the overall gain of welfare by the government control of the
prices.

Certainly enough, it can be seen by the above analysis of both economic systems
that the most efficient outcome in the market is when it is free from any form of
government intervention because price, alongside, willingness to purchase and
buying power allocates the resources to its most productive use, while planned
economy largely fails in this regard.

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