In order to accurately examine the belief that the market system best allocates resources and encourages positive investment climate we must look at the functioning of the market system, resource allocation and the criterion within a positive investment climate.

A Market System is a system where buyers and sellers interact without the intervention of government regulations. Inherent in this system is the concept that sellers want to gain maximum price for the goods, services and resources offered and buyers want to receive value for the lowest price. The balance of this relationship leads ultimately to the market equilibrium price. However, important to note in this system is that all factors external to the “Market” have no effect on this relationship that is government regulations or policies. Resources are therefore strictly allocated to the production of those goods which give the sellers maximum return and correspondingly give the consumers the maximum satisfaction of their wants at a market price.

Within the” Market system” resource allocation is heavily dependent on the variations of the price of the resources themselves. Price acts as an indicator to both the consumers and the sellers within the market (Price Signals as Guides for Resource Allocation, Anon, n.d.)

To be explicit given accurate price information the sellers will use high priced scarce raw materials, (e.g copper market) or resources to produce goods of high value. Likewise only those consumers who see benefit in consuming those higher valued goods will demand them therefore achieving balance within the system. Similarly where the price of a readily available resource is low it will be allocated by the resource users for use to produced goods in a lower valued tier and consumer behavior will also react accordingly.

To summarize, the shifts in the price of privately owned resources within a free market results from the shifts in the demand and supply of the resource i.e. capital, labor, raw material. This is believed to lead in turn to efficient resource allocation by the resource owners through:

1. (Expanding the supply) Reallocating resources to the production of high priced goods.
2. (Contracting supply) Reallocating resources away from the production of low priced goods.
3. Reallocating resources to production of goods in high demand by consumers in order absorb excess demand.
4. Reallocating resources away from the production of goods in low demand in order to absorb excess supply.

Therefore efficient allocation of scarce resources is based on private consumption, production decisions or a combination of both at the market equilibrium price.

The investment climate itself is determined by several factors which affect the investment choices, opportunities and the resultant benefits gained by a firm or investor. A good investment climate encourages efficiency and productivity in order to increase profits and therefore increase capital available for investment (Investment Climate, Anon, n.d.). We must recall that the market system itself encourages producers to allocate resources such that they are put to use where there will be no wastage at the market price i.e. Pareto optimal allocation (Griffiths and Wall 2008 p. 212). Therefore we can say that the market system fosters efficiency within the business environment through full utilization of investment capital, machinery and labor. Essentially this indicates that the market system encourages a positive investment climate.

It can be said that the creation of employment and market expansion is an indicator of a positive investment climate. As established, the market system is such that, where opportunities exists for both expansion into new markets or producer output to be increased, the private owner of the resources will act in response . For example, all things being equal, increased consumer demand for natural gas converted cars in Trinidad and Tobago would lead to increased production of scarce natural gas and new suppliers followed by increased job opportunities.