Most nations of the world have adopted the use of the market power as a tool for allocating resources rather than other alternatives such as central planning. This is because the market allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Under a market economy, firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices guide their decisions.
Prices reflect both the values of a good to society and the cost to society of making the good.
Because households and firms look at prices when deciding what to buy and sell, prices guide these individual decision makers to reach outcomes that, in many cases, promote general economic well-being by allocating resources efficiently. In a centrally planned economy, for example, prices are not determined in the marketplace, but are gauged by central planners. Central planners, however, lack the information that effectively reflects either the value of a good to the society or the cost of the good to the society that gets reflected in prices under market forces. Thus, the pricing mechanism under a central planning system does not take into account the social benefits and costs when exchanging goods and services. As a result, resources are not effectively allocated in a way that maximizes the welfare of society as a whole.