Government's intervention in an economy :
In a capitalist or free enterprise economy, there is no direct intervention by the government in deciding what goods and services to produce. Decisions regarding production, consumption and distribution are carried out through the price mechanism. In such an economy,consumers express their wants through the price system. The price mechanism indicates thewishes of the consumers and allocates the community's resources according to their wishes.Prices reflect how much the consumers are willing and able to pay for a good and the producers act according to these indicators. One of the principal functions of the price system is that it determines the methods of production in a free enterprise system. As there is keen competition among producers for high profits, this will force them to use the most efficient methods of production. When labouris cheap and plentiful, more labour and less capital is used. When labour becomes more expensive, mechanised methods are used. The price mechanis...