Analyse the main disadvantages of the price mechanism as a means of allocating resources
The price mechanism often results in market failures. By this we mean anything that is dysfunctional or when supply and demand breaks down. For example, no firm acting in its self interest will take notice of the pollution it lets out, thus this is market failure. Up until the late 1980's, the eastern bloc communist countries were controlled by the state. Inflation was almost non- existent since the state controlled everything. Workers could not push for higher wages and prices were static. Despite this system eventually breaking down due to the inability to produce enough of certain goods and the over- centralisation of production units which led to distribution problems, the planned system did not suffer from inflation, or the boom/recession cycle caused by fluctuations in the free markets of the western world. However, in a price mechanism system, the economy is a cycle as shown below
diagram here firms increase prices leads to consumers pay higher prices leads to price increase leads to workers push for higher wages leads to firms increase prices etc
This leads to inflation. The constant cycle causes uncertainty among consumers and firms. When the government increases interest rates, for example, as a means of reducing inflation, the economy may go into recession.
In a price mechanism economy, certain undesirable market structures emerge, monopolies being one form. A monopolist may earn abnormal profits due to its ability to be the unique provider. This is undesirable, some production may fall due to the lack of competitivity and prices may rise, affecting consumers. In the U.S., Microsoft was attacked by anti trust lawyers for trying to create a monopoly which would be against the interests of consumers. Oligopoly may also prove to be bad, since cartels may be created thus again allowing firms to make abnormal profits by restricting competition and increasing prices.
Inequality emerges in the price mechanism. Different social groups have different lifestyles due to the ability, or lack of it to buy goods. If the price mechanism worked for merit goods such as hospitals, then many poorer people would suffer from being unable to pay for it. If the state provides, then distribution of income(through taxes) and the supply of public and merit goods leads to greater equality.
The cobweb theory shows how the equilibrium price is distorted by forces of supply and demand.
Supply and demand graph here showing one year , when there is a bad harvest the supply goes down to A., and price goes up to B. The farmer produces more the next year to meet new demand at high price. Demand then goes down due to over supply. The equilibrium price is not reached when there is either too much demand or supply.
Assess the arguments for and against government intervention in the market for education
Government intervention in what is considered a "merit" good; means that exclusion does not occur. Everyone can go and the overall bill is paid for out of taxation. Education can be considered an investment since it provides for a future better work force. If education is supplied merely through supply and demand, then certain classes will be unable to receive this service. The result would thus be a poorer quality workforce, thus less competitivity against other foreign workforces. In the UK, this would be disastrous, since the EU allows complete freedom of mobility of labour from country to country. British workers would thus be incapable of performing as well as their european counterparts. With the increasing services industry in the developed countries, education is more important since these jobs often require educational qualifications.
Without government intervention, there would be no set uniform national curriculum. Those who could afford better education would be given better chances. The class gap would widen because the upper classes would obviously be able to pay for the best. The distribution of income would thus be almost non existent, due to the well off people being able to take on better qualified jobs.
However, government intervention may lead to a lack of competitive efficiency in the education market. If no government intervention existed, then each school would constantly try to increase its competibility to get ahead of the others. The result would be ever increasing national levels(providing agreements between the schools were not formed.)
If the price mechanism allocated teaching resources then better teachers would be better paid, thus increasing the incentive to work. However, if say for example, vouchers were issued by the government and parents were free to spend these on the schools of their choice, then the worse off schools may be ignored by parents thus causing small local schools to close down.
