Which situation indicates a market economy?

Question

BlackTom AI · Accepted Answer

Let’s break down the question by restating what a market economy entails and then evaluating each option against that concept.

Question: Which situation indicates a market economy?
Options:
- a. The allocation of resources is controlled entirely by the government.
- b. The allocation of resources is controlled entirely by the market.
- c. Both government and private companies provide services.
- d. The government carries out all planning and decisions.

Option a: The allocation of resources is controlled entirely by the government.
This describes a centrally planned or command economy, where decisions about production and resource distribution are made by the state rather than by market forces. It does not illustrate a market-based system.

Option b: The allocation of resources is controlled entirely by the market.
In a market economy, prices and voluntary exchanges driven by supply and demand allocate resources with minimal government intervention. The phrase 'controlled entirely by the market' aligns with that definition, highlighting the primacy of market mechanisms in decision-making.

Option c: Both government and private companies provide services.
A mixed economy features both government involvement and private enterprise. While this can include market features, it also reflects some level of state provision, so it is not as pure a depiction of a market economy as option b.

Option d: The government carries out all planning and decisions.
This is characteristic of a command economy or an economy with heavy central planning. It reflects substantial government control rather than market-driven allocation, so it does not indicate a market economy.

Summary perspective: Among the four, option b most closely captures the essence of a market economy where resource allocation emerges from market forces and price signals, rather than centralized government planning. The other options illustrate variations with stronger government involvement or centralized control, which are inconsistent with a market-based framework.

MUF0061 Economics Unit 1 - Semester 2, 2025

Which situation indicates a market economy?

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