Answer to Question #122234 in Microeconomics for Maryam

Question

Question- A free market economy operates to the benefit of both consumer and producer to achieve the most efficient outcome, and therefore there is no role for a government to play in controlling the market. Consider the extent to which this statement is correct. 25 marks

Answer 1

In an economy which is market-oriented with a democratic government, the choice of goods and services to be produced and where to produce involves mixed decisions by various stakeholders, including the government expressing supply and demand. However, the idea of efficiency maintains that some choices are better than others. Allocative efficiency is when resources are used in the production of goods and services preferred by society. On the other hand, production efficiency is when less costly production techniques are used in the production of preferred products in society. In a free market, the economy is based on supply and demand with least or no control from the government. A free market is disadvantageous because there is limited product range and danger of profit motive resulting in unethical business. The government has a role in controlling the market through regulation of competition, stabilization of economy and provision social and legal frameworks of operating the market.

Nevertheless, the limitation of government control of the market is that it slows down innovation, can create huge monopolies that can lead to consumer exploitation and regulations can create big government bureaucracy that slows economic growth. The statement is not correct because the government plays a crucial role to control the market. If the market is not controlled, the economy will be inefficient.