2281 · 2.2
The role of markets in allocating resources — FAQ
Frequently asked questions for 2281 The role of markets in allocating resources. Direct answers first, then deeper explanation — then practise with marking.
Who decides what gets produced in a market economy?
Consumers, through what they buy. Producers follow the profit those purchases create. No individual plans the overall pattern of production; prices coordinate it.
If prices allocate resources so well, why do governments intervene?
Because markets fail in particular cases: they ignore pollution, do not supply public goods, under-provide merit goods, and allocate only to those who can pay. Governments intervene where these failures are serious.
What is the difference between the signalling and incentive functions?
Signalling is about information — a price change tells people that something has changed. Incentive is about motivation — the profit that comes with a higher price makes producers act on the signal.