There are two ways of solving the basic problems. These are price mechanism and planning : Price mechanism refers to the system in which price is determined by the forces of demand and supply without any external interference which, where, how much goods and services are to be produced. Economic planning refers to the deliberate and conscious control of the economy by the central planning authority in order to achieve the laid down targets and objectives within a stipulated period of time.
The capitalist economy is governed by the price-mechanism and under price mechanism or market mechanism prices are determined by the interaction of demand and supply. In other words, prices are governed on the basis of people’s demand and producers’ supply of goods at different prices. If at a given price, the demand for a product is more than its supply, this will result in the rise of the price, which will result in a fall in demand on one side and rise in supply on the other. Thus a point or a price comes where both demand and supply are equal to each other. When neither demand nor supply exceeds in the market, it is said that economy has solved its basic problems i.e. what to produce and how much to produce in a more or less satisfactory way. It is generally believed that when price mechanism starts functioning effectively and efficiently; it can help in solving all other basic problems which includes fair and just distribution also.
In a socialist economy, the basic problems are solved by economic planning. However, in a mixed economy both price mechanism and economic planning are pressed into service in order to solve the basic problems. But certain persons feel that as compared to economic planning, the price mechanism does not solve the basic problems. They argue that in under-developed economies these forces help a little in achieving the required pace of economic development and also do not provide social justice for all in the fair distribution of national product. Thus price mechanism is an inadequate force so far as the solution of basic problems of all economies are concerned. In this regard following three reasons are given
(1) Economic needs of the people not represented equally: The first argument given is that forces of market demand and supply do not cover up economic requirements of the people equally, as the voting by ballots covers up the political requirements in a democracy. It is observed that market demand generally goes in favour of those persons who possess the capacity to spend more on their purchases. Thus, as compared to poor man’s necessity the rich man’s luxury snatches a greater portion of the resources of the economy. For example, the production of a private car is more profitable than the production of a public bus, even though the bus serves the transport needs of bulk of the people. Same are the cases of production of air conditioners, carpets, costly sarees etc. as compared to the production of table fans, durrees, dhotis etc. respectively.
Similarly, from the point of view of the supply, the poor need medicines whereas the rich lay more emphasis on the demand of cosmetics. The poor person requires hospitals whereas the private investor considers construction of a cinema house as profitable. Thus the choice fluctuates between cosmetics and medicines, big buildings and small huts, cinema houses and hospitals, big five star hotels and small dhabas, so far as the allocation of resources for production is concerned. Thus, the scale of supply goes to satisfy the needs of those persons who are economically stronger and financially sound because the allocation of resources through market mechanism does not work according to the rule of ‘one person one vote’ Therefore the price-mechanism generally favours the larger investor or the spender
(2) Self-interest: The market-mechanism takes into consideration only the self-interest and not the social interest Every buyer or seller is motivated by the self-interest during the transaction or exchange of goods For example, a cigarette producer, while producing cigarette, sees how he can earn maximum profit from its sale, though from the social point of view its production and sale is injurious to health. Similarly, the business community wishes that certain goods may be taxed less so that they may earn a maximum revenue, but the social interest desires that certain goods must be taxed heavily so that state may earn a revenue and may spend the same for the welfare of the people.
(3) Infrastructure: The market forces of demand and supply, to a greater extent, are insufficient so far as the question of the development of infrastructure is concerned. Infrastructure includes construction of roads, railways, bridges, facilities of irrigation, drinking water, generation of electricity, construction of dams; flood control; facilities of communication and such other social and economic services. These basic structures cannot be built rapidly through the market mechanism alone because these require huge expenditure which cannot be incurred by the private sector The reason is that this structure is not profitable Huge projects like construction of dam requires thousands of crores of investment, but the return from it is after a very long time and that too is not sure Thus, none will come forward to risk his money. Thus, if left to market-mechanism, these basic structures will remain in an under-developed stage. Take the case of India, all these infrastructures were taken up by the government and spent crores of rupees for their development during the five-year plans.
Thus, from the point of view of an under-development economy, planning mechanism has also to be taken into account so that the objectives of rapid economic development and social justice may be obtained. But it is generally observed that the public sector as compared to private sector, generally becomes inefficient as it does not deliver goods efficiently as the private sector does. It has been noticed that government-run industries have been suffering losses while the similar industries run by the private entrepreneurs are earning profits. Thus, in our opinion, the solution lies in the mixture of both the price- mechanism and planning-mechanism. India has adopted mixed economy where both price mechanism and planning mechanism are working.