Question

“The market mechanisms might produce a good (Pareto optimal) result, but not the very best result.” Give reason in support of your answer.

Answer 1

Answer

True, market mechanisms may produce pareto optimal results but those results may not be the best. This happens mostly in cases where the equilibrium price of say wheat is determined by the market forces of suppy and demand. Although the equilibrium price and quantity reached is pareto efficient but it could be the case the the wheat supplier does not receive even the minimum amount that he should have received.

In such situations, the government intervenes and brings in policies like Minimum Support price or puts a Price Floor on the Selling Price of the product. This ensures that the supplier receives at least the minimum amount that is sustainable for him to produce in the future.

This example shows how market mechanisms may produce pareto optimal results but those results may not be the best.