How Market systems work - A key feature of market economies is property right . Gains from trade also provide important incentive to move resource to more productive uses. D 0 Increase in supply Decrease in supply - Prices act to control and coordinate the many individual decision made in the economy. Everyone trades in the market place and all mutually advantageous trades are completed, the price system results in a Pareto-efficient resource allocation. No government intervention is required.
Market is competitive .
Internalizing the Externality Def. Exernality exist when the actions of one party affect the well-being or production possibilities of another party outside the exchange relationship. As long as property rights can be traded, there is an incentive to rearrange these rights to enhance economic efficiency, work done by Ronald Coase. Contracting costs are those costs include search and information costs, bargaining and decision costs, and drafting, policing, and enforcement costs. Coase theorem also suggests that contracting costs are central to the study of organizations.