4.1.8.1 Allocation of Resources

Question 1

Advantages of the Price Mechanism

Answer 1

• Gives an indication to firms of what goods and services to supply.
• Provide for allocative efficiency.
• Firms strive for productive efficiency.

Question 2

Disadvantages of Price Mechanism

Answer 2

• Impersonal method of allocating resources as it creates inequality.
• Information asymmetry and monopoly power lead to consumers being exploited by firms.
• Firms that cannot adapt as trends in the market change will go out of business.

Question 3

Undesirability of Introducing the Price Mechanism

Answer 3

• When there is an immobility of factors of production.
• It creates social costs with members of society missing out as they cannot afford certain products.
• Firms would not have a pool of workers with the required human capital to perform certain jobs.
• May reduce the number of merit goods and increase the number of demerit goods.