Question

In an economy with limited or no government intervention, resources tend to be optimally distributed. With appropriate example, explain how this happens.

Answer 1

Classical economists did not believe that the role of the government should be more prominent. They believe in self regulating economy instead of government intervention. These supported free trade in global market. Free trade occurs when there is elimination of import quotas and tariffs. There is a removal of government subsidies to domestic firms and end of other assistance to government industries. They believed the less codling of firms by government, the more competitive and productive domestic industry becomes.

A free market in economics refers to an idealized system wherein the prices for goods and services are determined by the open market and by consumers. Under free market system the laws and forces of demand and supply are free from any government intervention, by a price-setting monopoly, or by other authority. The pre-World War I, the economy of the world enjoyed stability in price and free trade under the international gold standard from the 1880s through 1914. Also in 1978 the deregulation of the airline industry in U.S. occurred where it reduced government restrictions the airline industry has grown tremendously. Similarly the services of telephone in developing countries are bypassing landlines as mobile industry is a more efficient approach to distribute phone service.