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"What is the role of prices in a free market? What would happen to the production...

"What is the role of prices in a free market? What would happen to the production and distribution of goods in the absence of a price system?"

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Answer #1

Free market is characterised by absence of government intervention in economic activities. All economic decisions are taken based on the demand and supply forces prevailing in the market.

Price acts as a signal to both buyer and sellers.

Allocation of resources and distribution of output are achieved with help of price prevailing in the market.

Efficiency can be achieved only in free market system provided there is no externalities.

In absence of price system in free market system, it would become difficult to allocative resources and goods efficiently. All the ups and down in free market system are solved through the price system. If price system withers away, the deformities and inefficiencies will crop up in free market system.

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