The correct option is 1 and 3 only.
Explanation
Economic systems are classified based on the mechanism used to allocate resources and solve the central problems of an economy (what, how, and for whom to produce). A Market Economy (Capitalism) operates through decentralized decision-making, while a Centrally Planned Economy (Socialism) operates through government directives.
Statement-wise Analysis:
- Statement 1 is Correct: In a market economy, the distribution of final goods and services is primarily determined by the purchasing power of consumers. Individuals purchase goods based on their ability to pay, rather than an assessment of their needs by an external authority.
- Statement 2 is Incorrect: Solving central problems through the directives of a central planning authority is the defining feature of a Command or Socialist Economy. In a market economy, the government does not dictate production or distribution; instead, these are determined by market forces.
- Statement 3 is Correct: A market economy relies on the price mechanism to coordinate economic activities. Prices serve as signals that convey information about scarcity and demand to producers and consumers, guiding resource allocation without the need for central coordination.
Key Takeaway:
The fundamental distinction between economic systems lies in the allocation mechanism: a Market Economy utilizes the price mechanism and purchasing power, whereas a Planned Economy utilizes administrative controls and central planning.