Q.Source / Case Study based question. Read the following paragraph and answer the question given below : In contrast to a centrally planned economy, in a market economy, all economic activities are organised through the market. A market, as studied in Economics, is an institution which organises the free interaction of individuals pursuing their respective economic activities. In other words, a market is a set of arrangements where economic agents can freely exchange their endowments or products with each other. It is important to note that the term 'market' as used in Economics is quite different from the common sense understanding of a market. In a market system, all goods or services come with a price (which is mutually agreed upon by the buyers and sellers) at which the exchanges take place. The price reflects, on an average, the society's valuation of the good or service. If the buyers demand more of a certain good, the price of that good will rise. This signals to the producers of that good that the society as a whole, wants more of that good than is currently being produced and the producers of the good, in their turn, are likely to increase their production. In this way, prices of goods and services send important information to all the individuals across the market and help achieve coordination in a market system. Thus, in a market system, the central problems regarding 'how much and what to produce' are solved through the coordination of economic activities brought about by the price signals. Q: Which of the following system do you prefer out of the centrally planned economy and the market economy and why ?
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Start your 14-day free trial to unlock the full solution →A reasoned choice either way is acceptable; the market economy is commonly preferred for efficiency and freedom.
This question asks for the student's reasoned opinion, so either choice is valid if justified.
Case for the market economy (commonly preferred): As the passage shows, prices act as signals that automatically coordinate the decisions of millions of buyers and sellers, allocate resources efficiently to where they are most wanted, and give individuals freedom of choice and an incentive (profit) to produce. It solves the 'what and how much to produce' problem without any central direction.
Case for the centrally planned economy: It can ensure equity, fair distribution and provision of public goods, and avoid the market's problems of inequality, unemployment and neglect of social welfare.
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