In a mixed economy, what role does the price mechanism play in resource allocation?

• A. It has no role in resource allocation.
• B. It eliminates all externalities automatically.
• C. It directs resource allocation in markets; government intervention when markets fail.
• D. It always ensures optimal allocation.

Answer: (C)

Prices act as signals and incentives that help allocate resources in markets. When demand for a good rises or supply becomes harder to obtain, prices rise, guiding producers to allocate more resources toward that good and consumers to adjust their spending. When supply increases or demand falls, prices fall, shifting resources away from less valued uses. In a mixed economy, this market mechanism works alongside government action to address problems markets alone can’t solve. The government steps in to correct market failures like externalities, provide public goods, regulate information gaps, and pursue social goals through taxes, subsidies, or direct provision. So the price mechanism directs resource allocation in markets, with government intervention when markets fail.