Economic Systems and Production Possibility Curves: Question 9

Worked solution

Step 1: Recall the case for a market economic system

A market economy relies on the price mechanism, prices adjusting through the interaction of consumer demand and producer supply, to allocate resources, rather than requiring a central planning authority to decide what, how and for whom to produce. Commonly cited advantages of this include the price mechanism responding quickly and automatically to changing conditions, and resources being drawn (via the profit motive) toward producing what consumers actually want, without the cost and complexity of centrally planning an entire economy.

Step 2: Evaluate each option

• A: correct. Automatic, decentralised allocation of resources through prices, without needing a central planning authority to make every production decision, is a genuine and commonly cited advantage of a market system.
• B: incorrect. A market economy rewards the factors of production according to what they earn in the market, which typically produces an unequal distribution of income and wealth; guaranteeing equality is more closely associated with the stated goals of a planned economy, not a strength of markets.
• C: incorrect. In a market economy, firms that persistently fail to cover their costs are normally forced to exit the market; it is a planned economy, where central planners can choose to keep an enterprise running regardless of profitability, that displays this feature.
• D: incorrect. Public goods and merit goods tend to be under-provided by an unregulated market (and demerit goods over-provided) because of the free-rider problem and consumers undervaluing their benefits. This is a recognised weakness, not a strength, of the market economic system.

Final answer

• The price mechanism allocating resources automatically, without a central planning authority, is the genuine advantage of a market system, option A.