Final answer:
The correct answer is option 3. A well-defined system of property rights and an efficient market price system are essential for the effective functioning of a market system. Economic freedom, competition, and protected property rights promote healthy market dynamics, preventing market failures and facilitating economic growth.
Step-by-step explanation:
For the effective functioning of a market system, a well-defined system of property rights is necessary. This creates a legal environment where individuals and firms have the right to own property and use it as they see fit, which includes the freedom to trade or sell that property. A strong legal system enforces contracts, reducing the risk associated with transactions and facilitating business and economic growth.
A market system relies on information provided through market price signals, which are efficient in disseminating information about the relative scarcities of goods and services. When markets are allowed to function without excessive control, such as through price controls or central coordination of resources, they inherently adjust to supply and demand dynamics, fostering resource allocation that reflects true market conditions.
Indeed, economic systems require certain basic characteristics to function effectively. These include economic freedom, competition, incentives, and a governmental role that protects property rights without overly regulating the market. Factors such as competition, mobility of resources, including labor and capital, and access to accurate information, are all key to avoiding market failures and promoting economic well-being.