Dolina, Athena Lynn P.

ECON 11 MTh 1:00 2:30

Market Systems
A market system is characterized as a free enterprise where individuals enjoy the right of private
property. It places a high value on individual freedom and allows self-interest to be a motivating force.
There is a price mechanism/ system and all decisions made are coordinated by the price system. The price
system is also considered as a signaling device. Any change in the price system will have an effect on the
buying and selling of a commodity.
A market system is considered to be efficient since the goal is of maximum efficiency. Both
producers and consumers strive for this kind of efficiency. But there is still the presence of an "invisible
hand" though a market system is said to be laissez- faire which literally means "leave things alone". The
invisible hand is always there in case of failures. The invisible hand in this context is the government.
The three roles of the government are: (1) to promote efficiency, (2) to promote equity, and (3) to
promote macroeconomic growth and stability. So what are the failures that a market system encounters?
Firstly, there is an inefficiency of the market. For example, in a monopoly there is no freedom to
choose where to buy if only one person is selling all of the goods. Another inefficiency to be considered is
the spillover effect of any good produced. Though these spillover effects may be good as well as bad,
there is still an inefficient system being run.
Secondly, there is an inequality between the rich and the poor. The rich will always get more than
the poor. But as a solution there is what we call income redistribution. One form of this is the bracketing
in taxes where the higher the income the higher the tax you pay. And the taxes collected are then
translated into social goods for the benefit of the poor.
Lastly, the macroeconomic problems that arise as well as the instability of the economy are the
last failures of the market. To stimulate the economic system and ensure a continuous business cycle the
government has implemented certain policies such as the monetary policy, fiscal policy and trade policy.