Consider the following statements:
1. In a market economy, all economic decisions are taken by the government in consultation with the private sector.
2. In a mixed economy, some important decisions are taken by the government and the economic activities are by and large conducted through the market.
3. In a centrally planned economy factors of production are owned and operated by government with an objective of social welfare.
Which of the statements given above is/are correct?
1 and 2 only
Incorrect Answer2 and 3 only
Correct Answer1, 2 and 3
Incorrect AnswerExplanation:
Statement 1 is incorrect: In a market economy, all economic activities such as supply and demand interactions, individuals freely exchanging their products with each other etc. are organized through the market without any government interference. There may be some government intervention or planning, but usually it refers to an economy that is more market oriented in general. In this kind of an economy most economic decision making is done through voluntary transactions according to the laws of supply and demand. Hence the arrangement which allow people to buy and sell commodities freely are the defining features of a market economy.
Statement 2 is correct: Most of the economies are mixed economies, where some important decisions are taken by the government and the economic activities are by and large conducted by the market. The extent of government control varies, for example the United States of America the role of government is minimal whereas in China, the role of the government is much more interventionist.
Statement 3 is also correct: in a centrally planned economy, the government or the central authority plans all the important activities in the economy. All important decisions regarding production, exchange, and consumption of goods and services are made by the government.Centrally-planned economic mandates surrounding the production of goods and services are often executed by state owned enterprises, which are government-created legal entities that engage in commercial activities on a government's behalf. The government may try to achieve a particular allocation of resources and distribution of final goods and services which is thought to be desirable for society as a whole.
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By: Abhishek Sharma