Question

Proponents of command economies and free market economies differ greatly in their theories of the government's role within the economy. In a free market economy, which of the following is true? a) It has increased the level of material wealth only for the people who were already wealthy. b) It has led to a decrease in the income gap between the workers and owners of businesses. c) It has allowed businesses to exploit their workforce in order to maximize profits. d) It has encouraged the natural growth of industry, leading to an increase in the standard of living.

Answer 1

A free market economy is characterized by decentralized decision-making with private ownership of means of production. Economic decisions are determined by market forces, not governments. Though market economies potentially lead to growth and greater efficiency, they also involve trade-offs between equity and efficiency.

Step-by-step explanation:

In a free market economy, decision-making is decentralized - private individuals or groups own and operate the means of production. The economic decisions such as supply of goods and services are determined by market forces and not governments. Businesses cater to the demands of consumers and individual income depends on their ability to transform resources into something of value to the society. Proponents of free market economies argue this system encourages natural growth of industry and leads to an increase in the standard of living.

However, it should be noted that no economy is purely market or command based. Most countries use a mix of both systems to varying degrees, striking a balance between efficiency of markets and equity of command economies. Equity and efficiency are often seen as trade-offs in economic systems.

While command economies tend to be more equitable, market economies lead to growth and are perceived to be more efficient. It can, however, lead to competition and widening income gaps. Yet, the incentives created by private property rights in a market economy often lead to more effort and investment, potentially enhancing efficiency and growth.

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