Economics – The allocation of resources - Market economic system | e-Consult
The allocation of resources - Market economic system (1 questions)
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Answer: While market economies offer many advantages, they also have potential drawbacks. Two significant drawbacks are:
| Drawback | Possible Government Response |
| 1. Market Failures - Externalities Externalities occur when the production or consumption of a good or service imposes costs or benefits on third parties who are not involved in the transaction. Negative externalities (e.g., pollution) lead to inefficient allocation of resources. | Government Response: The government can use taxes (e.g., a carbon tax) to make polluters pay for the negative externalities they create. This incentivizes businesses to reduce pollution. Alternatively, regulation (e.g., setting emission standards) can be used to directly control pollution levels. |
| 2. Inequality of Wealth and Income Market economies can lead to significant disparities in wealth and income. Some individuals and businesses accumulate vast amounts of wealth, while others struggle to meet their basic needs. | Government Response: The government can use progressive taxation (where higher earners pay a larger percentage of their income in taxes) to redistribute wealth. This revenue can be used to fund social welfare programs (e.g., unemployment benefits, healthcare, education) to support those in need. Minimum wage laws can also help to ensure a fairer income for low-skilled workers. |