The role of markets in allocating resources — common mistakes

Use the three function names in an 'explain how the price mechanism allocates resources' answer — and attach each one to the example in the question. Naming the functions without applying them earns only knowledge marks.

An evaluation point that always fits: markets allocate resources efficiently when prices reflect true costs and benefits — then give one case where they do not (pollution, public goods) and say the government may need to step in.

Consumers, through what they buy. Producers follow the profit those purchases create. No individual plans the overall pattern of production; prices coordinate it.

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.

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.