The market economy is decorated with the instability because of inefficient use of resources. The instability is associated with upward and downwards swings of economic activity. As a result of such business cycles, there is uncertainty in the field of investment. As in the phase of boom, there is a wide spread rise in prices, wages and profits etc.
while in depression, there is unemployment and unsold goods and services, thus bringing a lot of miseries for human being. Sometimes, there is shortage of goods, while on other occasions; there is the phenomenon of over production of goods and services. Thus, cyclical; instability causes inefficiency in respect of investment, capacity utilization, labor employment and need satisfaction. Whether all this will coincide with Pareto's of consumption and production?
Price distortions:
The market economy runs on the basis of signal of price whether it is price of a good or price of a factor. But in market economies, particularly in UDCs there are price distortions. As a result of price distortions the prices do not reflect the preferences of consumers: scare or real value of factors of production like capital and labor etc; real rate of return of producer's etc. thus we find that market mechanism fails to assess the real value of factors and goods.
while in depression, there is unemployment and unsold goods and services, thus bringing a lot of miseries for human being. Sometimes, there is shortage of goods, while on other occasions; there is the phenomenon of over production of goods and services. Thus, cyclical; instability causes inefficiency in respect of investment, capacity utilization, labor employment and need satisfaction. Whether all this will coincide with Pareto's of consumption and production?
Price distortions:
The market economy runs on the basis of signal of price whether it is price of a good or price of a factor. But in market economies, particularly in UDCs there are price distortions. As a result of price distortions the prices do not reflect the preferences of consumers: scare or real value of factors of production like capital and labor etc; real rate of return of producer's etc. thus we find that market mechanism fails to assess the real value of factors and goods.