Market mechanism

Government interference in the market mechanism can lead to economic inefficiency when it is applied to some private goods. Prices convey a lot of information. They not only tell producers what to produce but also inform the producers to produce what people want. The more inaccurate the information gets, the lesser will be the economic coordination which will in turn lower satisfaction of wants. Thus interference in the information conveyed by prices is destructive to economic development if misapplied or overused. However, the market mechanism often cannot optimize for public goods, owing to problems such as the tragedy of the commons. For example, modern highways have been good for economic development, but it has taken government planning and allocation to bring them into existence.

Other market mechanisms include government fiscal policy and monetary policy, described by the Friedman rule proposed by Milton Friedman. These policies will influence demand by price adjustments through taxes and charges and through adjustments to the value of money by the related supply of money.