Which of the following is most likely to occur in a market economy without a strong legal system?

• A. Market participants will have perfect information and trust.
• B. Prices will always reflect the true value of goods and services.
• C. Government intervention will be unnecessary for economic efficiency.
• D. Property rights may not be well protected, leading to reduced investment and economic growth.

Answer: (D)

Verified step by step guidance

1. Understand the role of a strong legal system in a market economy, particularly how it enforces property rights and contracts.
2. Recognize that without strong legal protections, property rights may be insecure, which can discourage individuals and firms from investing or engaging in economic activities.
3. Analyze how the lack of secure property rights can lead to inefficiencies, such as reduced incentives to produce or innovate, because agents fear losing their assets or returns.
4. Consider why perfect information and trust are unlikely in such an environment, as legal enforcement helps build trust and reduce information asymmetries.
5. Conclude that without a strong legal system, government intervention might become necessary to correct market failures, and prices may not accurately reflect the true value of goods and services due to these inefficiencies.