WORKINGS OF THE MARKET MECHANISM. WHAT CAN CAUSE

The workings of The Market Mechanism What Can Cause Markets To Fail?



Market Mechanism

Q1- Explain the workings of the market mechanism. What can cause markets to fail?

Ans. The main focus of economics is how societies can satisfy their wants as fully as possible, given their limited resources for providing the items that satisfy such wants. Amongst many explanations offered, market mechanism is more generally defined as the process by which a market provides a solution for allocating resources and making decisions about the quantity of goods and service that should be produced without involving the government. The following paper will analyse the role of market mechanism in relation to offering public goods especially the fire service. It will critically analyse whether market mechanism is used in its pure form where the market forces are allowed to determine the prices of public goods or whether it is used in partial form where there is some degree of government intervention.

The role of fire services will be used to explain the concept of market mechanism and towards the end recommendations would be made to improve effectiveness. Prior to starting the discussion, it is important to clarify a few concepts and explain the role of fire services in the UK. Economics is more commonly defined as, the science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses. Thus economics is about people and the choices they make. (Her Majesty's Revenue and Customs, 2005) Market mechanism is generally defined as a process of allocating resources and making decisions about how much of a good or service should be produced and it also serves as an alternative way of having such decisions made without much government intervention. In simple words, the demand and supply forces in the economy help to solve the problem of allocating resources efficiently. The main focus of economics is how societies can satisfy wants as fully as possible, given the limited availability of resources to satisfy such wants. (Office of National Statistics, 2005)

Market mechanism has been generally defined as,“The market mechanism is the process by which buyers and sellers, acting in their own interests, establish a market price and determine the quantity of a good exchanged in a market. Buyers (consumers) attempt to improve their well-being by obtaining goods and services for consumption at the lowest possible prices. Sellers (producers) seek to earn profits by selling goods and services at the highest possible prices. However, in a competitive market neither buyers nor sellers can control the market price. Furthermore, both buyers and sellers must have good information about relevant alternatives, and they must be able to purchase or sell in a variety of geographically separated markets if the market outcome is to be efficient. A market that satisfies certain characteristics-many buyers and sellers, good information, and trader mobility-and in which relatively homogeneous (identical or nearly identical) goods are traded is said to be ...