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 mechanism can also determine where goods will be produced. Goods which
require more labour will be produced in areas where labour is cheap and abundant. On the other hand, goods which require more land may be produced in suitable land areas. For example, U.S. producers shift their factories producing labour intensive goods to countries
like Hong Kong and Singapore where labour is cheaper.
Hence, through the price mechanism, there is freedom for a consumer to get what
he wants; for a producers to produce commodities which are most profitable in the most efficient way; for factors of production to be used for different purposes at the optimum level.
However, the price mechanism does not work smoothly or produce satisfactory results in certain circumstances. This is so as the workings of the price mechanism are dependent on certain assumptions which may not exist in the real world.
Firstly, the producers may not know when consumers' wants have changed. It is often
possible to adjust to changes in consumers' wants. This is especially so in the modern
economy where producers produce goods in anticipation of consumers' demand. Secondly,imperfect knowledge can also cause the producers not to use the cheapest methods of production. Inefficiency in production can also result when production is carried out by a large number of small firms when it can be carried out by one or two large firms.
In certain cases, misallocation of resources occurs. Firms may only be interested in makingprofits and will not produce goods and services important to the country if there is no price attached to these goods. Goods in this catergory includes defence, health and education.
Sometimes, the means of production may be devoted to producing luxuries for the rich to
the exclusion of the basic necessities of the poor. For example, the free enterprise system may ration out limited supplies of goods and services to only those who have the money to buy them but not to those who need them most. The enhancement of the unequal distribution of iincome can, therefore, occur under the free enterprise system.
Under the free enterprise system, there are also often periods of unemployment.
Labour may not be mobile between industries and occupations because of the time period required for training and education when labour has to be re-employed. There may also be inadequate information regarding job opportunities. When business conditions are good, producers will produce more to make more profits. When business conditions are poor, the producers will not hesitate to cut back production, thereby causing unemployment. The resources of the economy will also not be fully utilized under such conditions.