Allocation of resources in the market
- The many ways in which traditional market systems fail in accomplishing the goal of optimization of resources.
- The role of competition.
- Monopolistic behavior.
- The neoclassical model.
- The law of supply and demand.
How does the free-market allocate its resources? This is a question that needs to be considered when choosing an economic theory to base a society on. The well-known neoclassical model is one that takes it direction from the laws of supply and demand, and is not one that accepts the notion of government intervention, as it believes that market forces are sufficient to keep the system working at its best. We will begin by discussing what, according to Holesovsky, are the "valuable properties of the market" with respect to the allocation of resources. And despite these properties, how do markets fail to optimize the allocation of resources? What role should the state have in fixing them? Holesovsky cites the many ways in which traditional market systems fail in accomplishing the goal of optimization of resources, and there is no doubt, these ways are plentiful, but there are also these valuable properties of the market.
[...] is clearly something about capitalism which works, and can be used as a model for other sectors, and this is what Holesovsky refers to as the valuable properties of the market with respect to the allocation of resources. (Holesovsky, 1977:195). That something that he speaks of if the private sectors amazing ability to respond to demand with supply, and vice-versa. It connect people and good and services in a way that government could never do. The market system is one that has infinite possibilities; it inspires people to progress in the pursuit of social approval and even success. [...]
[...] The law of supply and demand in the neoclassical model can be understood as ?modes of human interaction? because they involve rational actors that are making rational decision which are affecting the way the market works. In a market, there are buyers and sellers, and these actors perform modes of human interaction. They set price by establishing how scarce the item is, and therefore how much it is worth. The market is not a precise measurable entity, it has its inaccuracies, but these modes of human interaction balance out the imperfections and serve to create a level of equilibrium. [...]
[...] Another way the market fails in allocating resources is through the external effects for their industry. These are costs associated with the industry that are not fully paid by the consumer, and therefore they spill over to others. This cost is not necessarily quantified in money, but there is still a cost, for example environmental degradation. This means that the buyer is getting to product (etc ) at a subsidized cost. For example, if a toy factory produces a lot of pollution for a particular community, it is unlikely that the cost of the toys will reflect this environmental degradation, a cost that must be absorbed by the public as a whole. [...]