Which of the following is a major advantage of a market economy?

• A. It eliminates the need for competition among firms.
• B. It allows resources to be allocated efficiently through the price mechanism.
• C. It ensures that the government controls all production decisions.
• D. It guarantees equal distribution of income among all citizens.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a market economy, which is an economic system where decisions about production and consumption are guided by the interactions of individuals and firms in markets, primarily through supply and demand.
2. Step 2: Recognize that in a market economy, prices serve as signals that help allocate resources efficiently. When demand for a good increases, its price tends to rise, encouraging producers to supply more and consumers to use less, balancing the market.
3. Step 3: Identify that competition among firms is a key feature of a market economy, not something that is eliminated. Competition drives innovation and efficiency.
4. Step 4: Note that government control over production decisions is characteristic of a command economy, not a market economy, so this is not an advantage of a market economy.
5. Step 5: Understand that a market economy does not guarantee equal income distribution; income inequality can exist. The major advantage is efficient resource allocation through the price mechanism.