When there are many producers and many consumers in an economy, the best way to

Question

When there are many producers and many consumers in an economy, the best way to achieve an efficient allocation of resources is to have a

A. single planner who makes all production decisions and allocates all goods and services to consumers.

B. centralized system in which the government owns all productive resources and allocates all goods and services to consumers.

C. freely operating economy in which all markets are perfectly competitive.

D. freely operating economy with some very large firms that make most production and pricing decisions.

Explanation / Answer

When there are many producers and many consumers in an economy, the best way to achieve an efficient allocation of resources is to have a freely operating economy in which all markets are perfectly competitive.

This is because in the perfect competitive market profit maximizing rule indicates that price equals to marginal cost. So, no buyer or seller can influence the economy because of perfect competition, and firms will produce upto that level what people wants and cannot charge higher price due to competition.

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