Which of the following is a defining characteristic of a market economy?

• A. Production is based solely on tradition and custom.
• B. Resources are allocated through the price mechanism.
• C. Goods and services are distributed equally among all citizens.
• D. All economic decisions are made by the government.

Answer: (B)

Verified step by step guidance

1. Understand the concept of a market economy: It is an economic system where decisions about production, investment, and distribution are guided by the interactions of individuals and firms in markets.
2. Identify the role of the price mechanism in a market economy: Prices are determined by supply and demand, and they serve as signals to allocate resources efficiently without central planning.
3. Compare the given options with the characteristics of a market economy: Production based on tradition relates to a traditional economy, equal distribution of goods relates to a command or planned economy, and government decision-making is typical of a command economy.
4. Recognize that in a market economy, resources are allocated through the price mechanism, which balances supply and demand and guides economic decisions.
5. Conclude that the defining characteristic of a market economy among the options is that resources are allocated through the price mechanism.