A free market economic system is a method of allocating resources, which is based on the market price. Prices are determined through unrestricted competition between the state and privately owned business entities
Command system works best when there are extreme market imperfections and uncontrolled monopolies
A command system works badly when the government control most of the resources and discourage fair competition because it leads to inequalities and poor quality of goods and services.
The contest method of resource allocation works efficiently because increased competition ensures fair prices of goods and services. Additionally, the wage rates are high and the quality of products and services improve as various market players strive to attract customers.
Marginal benefits entail the gains that an individual derives from consuming an extra unit of a product or a service. It is the maximum amount of resources that an individual is willing to give up to obtain an extra good or service. The principle of decreasing marginal benefit states that marginal benefits or satisfaction that an individual enjoys from consumption of an extra unit of a good or service declines as the individual consumes more goods or services.
Production of an extra unit of a good or service increases the marginal cost. However, gains from the sale of the extra unit increase the marginal benefit. The most efficient production level occurs when the marginal benefit is equal to the marginal cost because, at this point, a firm is able to cover any extra production cost and thus able to make normal profits.
Consumer surplus entails the difference between what consumers pay for a product or a service and what they are willing to pay. It is the benefit that consumers get for paying less than the market price. On the other hand, the producer surplus indicates an economic difference between what producers receive for a particular good or a service and the minimum amount that producers are willing to accept for that particular good or service.
The most efficient combination of price and quantity of pizza is 20unts of pizzas at $ 8
The consumer surplus is represented by area A
Area B represents producer surplus
The command approach is the best in resource allocation when private institutions enjoy excess monopoly powers. The government intervenes by dictating commodity prices and wages. For example, the determination of minimum wage to protect labor suppliers from exploitation.
The federal government uses a combination of market prices and taxes to ensure efficient allocation of resources because the use of one approach is less efficient. For example, if US use taxes only to allocate resources, some producers will take the advantage of tax imposed on products to exploit consumers. Additionally, the government uses the tax policy to redistribute resources through the provision of public services even to non-payers. Since tax significantly influences market prices, both must be used together to ensure a fair resource allocation.
The allocation of resources to influence other countries is efficient because the US economy relies on other countries in different ways. Therefore, instabilities in those countries will significantly affect the US economy.
Opportunity cost entails what an economy foregoes in order to undertake a particular program. Some programs like military intervention in other countries have led to the suffering of some major programs like the provision of full public health insurance cover which receive less allocation.
The marginal benefit that in enjoy by allocating resources in the pursuant of my bachelor degree is satisfactory education services that I receive. The education achievement guarantees me good job and high income. Therefore, the marginal benefit surpasses the marginal cost because what I gain from employment is higher than what I spent in education.
The time when I bought more airtime than what I normally use because I wanted to consult my classmate about an assignment resulted in less marginal benefit than marginal cost because I expected to get a bonus, but my friend was unreachable and the bonus I got expired.
The government should have the right to take more from my income since it uses the tax promote economic development which in turn will increase people’s income, resulting in an expanded market for my business. The government will also develop other critical areas that are essential for good performance of my business using the tax collected.
