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How are resources allocated in a classical market economy? Based on the above definition, discuss the principles and mechanisms in allocating goods and services in Hong Kong.

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TMA 4 Question:- How are resources allocated in a classical market economy? Based on the above definition, discuss the principles and mechanisms in allocating goods and services in Hong Kong. Answer: A market economy is characterized by private ownership and intellectual property rights and de-centralized decision makings. Meanwhile, effective competition and free exchange of goods constitute the core of a market economy. Individuals and private firms make the major decisions about consumption and production. A system of prices, of markets, of profits & losses, of incentives & rewards together determine what, how and for whom (three basic problems of any economic organization) while the government keeps it policies off (laissez-faire) the market's economic decisions (Samuelson, Nordhaus, 2001, pp. 8 - 9). Private firms produce the commodities that yield the highest profits (the what) by the techniques of production that are least costly (the how). Consumption is determined by individuals' decisions about how to spend the wages and property incomes generated by their labour and property ownership ( the for whom) (Samuelson, Nordhaus, 2001, pp. 34 - 42). In the market economy, the economic activities are co-ordinated in such a way that the three basic economic problems due to scarcity of resources and unlimited wants of human being are handled by the price system. ...read more.


(Yu, 2006, pp 163). Also, Milton Friedman (1980) cites Hong Kong's economic achievement as a classic illustration of the benefits of free market policy. Rabushka (1979) describes Hong Kong as the last bastion of laissez-faire. Although the characteristics of Hong Kong economy are resemble to those that a market economy possessed, the development of economy of Hong Kong is in fact largely attributable to the economic management of the government instead of there is a laissez-faire policy and solely the market forces (Yu, 2006, pp 164). Hong Kong economy was aided by the government, whose civil servants greatly facilitated industrial planning and the development of local industry (Vogel, 1991 pp 69). The Hong Kong government has substantially, though subtly, intervened in Hong Kong's economic affairs (Schiffer, 1991, Castells, 1992, Henderson and Appelbaum, 1992). From their illustrations and explanations, the Hong Kong government has tried its best to cultivate an business environment for private business to furnish, thus contributing to the economic development and resources allocation of Hong Kong. Indeed, a perfect market economy cannot be found. Also, a situation where all prices, which are the carriers of correct information at any time, are right will never come into being. ...read more.


There are also essentially no foreign exchange control nor central bank and Hong Kong is regarded as a "capitalist paradise" (Woronoff, 1980) 4. Lastly, from the financial perspective, the Hong Kong government has taken the supervisory role in order to maintain Hong Kong status as an international financial centre and the remarkable growth in Hong Kong's financial services in banking, insurance, and securities trading and fund management. In avoiding over-regulation, the government has provided the up-to-date financial infrastructure and highly adaptable workforce to sustain an open and competitive financial market (Yu, 2006, pp. 180). In complementing the operation of the financial market, there are robust monetary regime, stable currency and healthy banking sector which are monitored by the government. In addition, coordinating function on the financial markets can be well seen from the regulation of the exchange rates markets. Reference:- 1. Samuelson, P A and Nordhaus, W D (2001) Economics, 17th edition, McGraw-Hill. 2. Kui Wai Li (2006), The Hong Kong Economy, Recovery and Restructuring, Mcgraw-Hill. 3. David Faure and Lee Pui Tak (2004), A Documentary History of Hong Kong: Economy, Hong Kong University Press. 4. Fu-Lai Tony Yu (2006) Studies in Entrepreneurship, Business and Government in Hong Kong: The Economic Development of a Small Open Economy, The Edwi Mellen Press. 5. Course Materials ?? ?? ?? ?? Student No: 10342923 Student Name: Leung Tak Man 1 ...read more.

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