Which of the following is a disadvantage of a market economy?

• A. It ensures that all resources are allocated by the government.
• B. It guarantees equal access to goods and services for all citizens.
• C. It eliminates the need for competition among firms.
• D. It can lead to unequal distribution of wealth.

Answer: (D)

Verified step by step guidance

1. Understand the definition of a market economy: it is an economic system where decisions about production, investment, and distribution are guided by the price signals created by supply and demand, with minimal government intervention.
2. Recognize that in a market economy, resources are allocated based on individual choices and market forces rather than government directives, so the statement 'It ensures that all resources are allocated by the government' is incorrect.
3. Know that a market economy does not guarantee equal access to goods and services because income and wealth disparities can affect purchasing power, so the statement 'It guarantees equal access to goods and services for all citizens' is not true.
4. Recall that competition among firms is a fundamental characteristic of a market economy, which drives innovation and efficiency, so the statement 'It eliminates the need for competition among firms' is false.
5. Identify that one disadvantage of a market economy is that it can lead to an unequal distribution of wealth, as market outcomes depend on factors like skills, resources, and opportunities, which vary among individuals.