Question

. It is argued that the beauty of free market economies is that price mechanism solves

here the problems of income generation and income distribution at one go and in an

efficient way. There is little point in discussing distribution at the macro level. Is this a

correct statement? Argue your case.

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Answer 1

According to the statement, in free market economies, price mechanism solves problems of income generation and income distribution at one go and in an efficient way.

I don't think this is a correct statement, because there is hardly any free economic market left. And even if there is a free economic market, there are profit seekers who have imperfect information and seek to benefit because of profit maximization, this leaves less money in the hands of the common man as there are often monopolies who try to seek as much profit as possible. Prices are either too much without any regulatory authority and goods are scarce in order to keep prices competitive, this reduces income distribution and generates problems of income generation because firms get to exploit and increase their market share. There will be cases when new firms come up because of higher profit making opportunities, but this takes a long time for the market to recover, short term ways to benefit everyone are not present without government intervention.

Now instead with some form of government and regulatory intervention in these markets. Free market economies can solve the problems of income generation and distribution. For example, when governments provide price ceilings, consumers benefit as they don't have to pay for a particular product above a certain level. This leads to efficient income distribution as consumers gain from this effect and money is evenly distributed across various strata of households.