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Assessment of the market economy system

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Title: The market system is the best method of resource allocation. Governments should limit themselves to the protection of private property rights. Discuss When people talk about free market economy, we usually associate it with capitalist economy system, which was an unacceptable form from Chinese viewpoint in the old days. However, in the modern world, market economy does play an important role in regulating actions in the trading market and many countries are running under the market economy system as well. In my opinion, market economy is the best method of resource allocation up to now, and it should be put into the dominant and decisive place in the economic system, government intervention mixed at the same time. As economy is concerned with allocating the scarce resources to satisfy human beings' unlimited wants, the central problem is focused on problem of scarcity. So any economy system, whatever command economy or market economy, must be able to allocate resource as efficiently as possible. However, market economy, has an absolute advantage in both productive and allocative efficiency, compared with the former, because people can make rational choices according to the interaction of demand and supply which will have an impact on the price of the goods and services. ...read more.


the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable on man to do the work of many." Resource: Adam Smith the Wealth of Nations Book1 Ch1 pp.15 As we know, nowadays, division of labour occurs in almost all areas of market economy. For example, in schools, different teachers give different lessons, some staff are responsible for the management of the school, some are responsible for the library, some are responsible for the IT Center, some are responsible for the restaurant, etc. we cannot let people be self-sufficient, because it will lead to extremely low efficient, if they could do all the jobs. Additionally, specialization also provides individual an opportunity to specialize in each activity where they have a comparative advantage so that the society as a whole will again get the increased efficiency. This is particularly common in trading. Take China for example, table 1 shows the total units of each type of production produced by the two parts of China over a certain periods of time: Comparative advantage (units of output) ...read more.


p.212) Facing these problems in a free market, government intervention is strongly needed for redistribution of resources, for correction of externalities, for regulations and laws. Taking taxation for example, government imposes a tax on that medical factory to equal the marginal pollution cost, thus it will internalize the externality it created into its cost, which is shown in figure 3. Also it will make the factory an incentive to reduce the pollution as much as possible, because it is the same as to reduce its cost. So the MSC curve shifts downwards to a new level and because of the tax, MC curve shifts upwards to meet MSC' where MC'=MSC'. Hence there will be a change to equal marginal private cost (MC) to marginal social cost (MSC), which results in social efficiency. In conclusion, market economy system has absolute advantages in allocating limited resources. It automatically maximizes both the productive efficiency and allocative efficiency in ways of constantly minimizing the cost by the development of high technologies. In doing so, the world has made unconceivable wealth. At the same time government should also play its role in the market, wherever the market is efficient enough, government should protect private property rights, wherever market is not efficient enough, government should take action of macro-intervention to regulate market system with different methods. ...read more.

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