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How a capitalist economy is not self-motivating, self-coordinating and self-regulating?

Question:

How a capitalist economy is not self-motivating, self-coordinating and self-regulating?

Capitalism:

Capitalism is an economic system where determination about trade and distribution are made by private owners and buyers without intervention from the government.

Answer and Explanation:

One of the main assumptions of capitalism is that the market is able to operate on its own because profit and utility maximization will result in the correct decisions being made. A capitalist economy can only work effectively, however, if it is self-motivating, self-coordinating, and self-regulating. The problem is that these objectives can not always exist because of imperfect information. If all buyers and sellers were perfectly informed, the market could operate freely and fairly. However, it is typically the case that the sellers have the upper hand in regards to information, which allows them to maximize their benefits at the expense of what is best for society as a whole. For example, with no government oversight in the health industry, physicians and pharmaceutical companies would have the ability to hide certain facts from patients in order to increase their profits (ie the side effects of a drug). Because patients typically would not know any better, there would be no check on the system.


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What is Capitalism? - Definition & Examples

from Business Management: Help & Review

Chapter 1 / Lesson 21
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