It determines the value of productive resources and allocates them in use which they will earn highest return. The rewards offers to owners of productive resources are determined by the value of the products made from those resources are to changes in the conditions affecting demand and supply to reallocate resources and seek higher returns for their use. In theory the free market is highly efficient because it rewards low cost production (technical or productive efficiency) allocates resources to their best use(lowest opportunity cost allocate efficiency and brings about changers which improve recourses use dynamic efficiency However the market system has a number of weaknesses and limitations. Some people in our society are unable to contribute resources to production for reasons such as age or infirmly. A pure market would not allocate any of the proceeds of production to people who could not prove it with resources.
Also in our society we cannot granite that such people will be fully supported by their families. Thus since the finical means of charity group are limited only the government can assist those who suffer in a market economy. For example America relies a lot on non profit organisations such as charities.
Another limitation is the handling of externalities or spill over effects.
Externalities are side effects on people that are not directly involved in production process. For example estapostous is a negative externality. When spill over costs are significant, the market will over allocate resources to the production of that good or service. The equilibrium output will exceed that output which gives allocation efficiently. View More »