In evaluating the comparative performance of economic systems, which of the following best explains why a pure market economy is less effective at achieving social equity than a command economy?
- Resource allocation in a market economy is determined by consumer purchasing power rather than societal needs.Answer
- BCentral planning boards in market economies fix prices below equilibrium, causing chronic market shortages.
- CThe state retains exclusive ownership of all capital assets, suppressing private initiative and market competition.
- DThe price mechanism automatically eliminates negative externalities by internalizing all production costs.
Answer
Resource allocation in a market economy is determined by consumer purchasing power rather than societal needs.
In a free market economy, the price mechanism allocates resources based on effective demand—meaning consumer purchasing power dictates what is produced. Because wealth and income are naturally distributed unevenly under private ownership, market economies struggle with social equity compared to command economies where the state distributes goods based on administrative assessments of societal welfare.
Step-by-Step Solution
Key Concept
Comparative Evaluation of Market and Command Economic Systems