Question

Why is the traditional economic system inefficient in its allocation of resources and production of goods?

Answer 1

Traditional economic system based on the completely free market can get into a situation of a failure. This can be viewed through different perspectives:

1. Neoclassical economic point of view: Economic value is lost when the allocation of resources and production of goods is not efficient enough (or Pareto efficient). The main reason for market failure is percieved to be because of self-regulatory organizations, governments or other insititutions. This basically means that when government intervene in the market (with taxes, wage and price controls, subsidies) it can lead to the inefficient allocation of resources.

2. "Nature of the market" viewpoint: Economists see market as a place where individuals can benefit from trade with each other, but sometimes inefficiency can be caused by imperfect competition (or in other words monopolies, monopolistic competitions, oligopolies). Imperfect competition can be a result of a certain geographical condition which give certain individuals an advantage in the free market competition (that is called natural monopoly). Other reasons for inefficiency can be caused by entry barriers which occur when other companies cannot enter and compete in the market freely.

3. Marxist viewpoint: Some economists would argue that the system is placed to be inefficient in the first place. For those economists market failure means that market is failing to achieve its wider social goals, for example - reduce inequality. Marxian economists argue that the individual property rights are the problem in itself, and the resource allocation and production of goods should be done in other ways.