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1. What is the ‘economic problem’? The fundamental economic problem is related to the issue of scarcity. Scarcity means that resources are limited and short in supply in the world (e.g. diamond). Because of limited resources and unlimited demands, society needs to decide how much to produce and distribute these relatively scarce resources. The basic economic problem can be define as what to produce, how much to produce and for whom to produce. Some countries are lucky to have great natural resources, whilst others do not. For example Africa and South America have little marketable resources. That means there are uneven distributions of resources. Sometimes suppliers have issues with shortage and surplus. A shortage is to do with…show more content…
The market mechanism is an alternative ( 選擇性的), for example, to having such decisions made by government. Often the incentives that consumers and producers have can be changed by government invention in the market. For example, a change in relative price brought about by the introduction of government subsidies and taxation. Indirect taxes can be used to raise the price of de-merit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level. Subsidies to consumers will lower the price of merit goods. They are designed to encourage consumption (and output of products with positive externalities. A subsidy causes an increase in market supply and leads to a lower equilibrium price. Government intervention in the market sets out to attain two goals: social efficiency and equity. Social efficiency is achieved at the point where the marginal benefits to society for either production or consumption are equal to the marginal costs of either production or consumption. Also, due to the intervention, competition brings price down and drives up the quanlity of goods and services. However, there are also some disadvantages. The disadvantages vary dependant on what method is used to correct the failure. For example

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