A free market is a market structure which Is not controlled by a designated authority. A free market contrasts with a controlled market or regulated market, In which government policy intervenes in the setting of prices. Is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities. In financial markets, free market stocks are securities that are widely traded and whose prices are not affected by availability. In simple terms, a free market is a summary term for an array of exchanges that take place in society.
Each exchange is a voluntary agreement between two parties who trade in the form of goods and services. Just like supply-side economics, free market is a term used to describe a political or Ideological viewpoint on policy and Is not a field within economics. Advantages: It contributes to political and civil freedom. It contributes to economic freedom and transparency. It ensures competitive markets. Consumers’ voices are heard in that their decisions determine what products or services are in demand. Supply and demand create competition, which helps ensure that the best goods or services are provided to consumers at a lower price.
Disadvantages A competitive environment creates an atmosphere of survival of the fittest. This causes many businesses to disregard the safety of the general public to increase the bottom line. Wealth is not distributed equally – a small percentage of society has the wealth while the majority lives In poverty. There Is no economic stability because greed and overproduction cause the economy to have wild swings ranging from times of robust growth to cataclysmic recessions. Arguments for Government Intervention 1. Greater Equality – redistribute income and wealth to improve equality of opportunity and equality of outcome 2.
Market Failure – Markets fall to take Into account externalities and are Likely to under-produce public 1 merit goods. For example, governments can subsidies or provide goods with positive externalities. 3. Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment. Arguments against Government Intervention 1. Governments liable to make the wrong decisions -? Influence by political pressure groups, they spend on inefficient projects which lead to inefficient outcome. 2. Personal Freedom. Government intervention is taking away individuals decision on
Market is best at deciding how and when to produce. Government Intervention to Overcome Market Failure 1 . Public Goods. In a free market, public goods such as law and order and national defense would not be provided because there is no fiscal incentive to provide goods with a free rider problem (you can enjoy without paying them). 2. Merit Goods / Positive Externalities. Goods like education and health care are not strictly public goods (though they are often referred to as public goods). In a free market, provision tends to be patchy and unequal. 3. Negative Externalities.
The free rake does not provide the most socially efficient outcome, if there are externalities in consumption and production. For example, a profit maximizing firm will ignore the external costs of pollution through burning coal. This leads to a decline in social welfare. 4. Regulation of Monopoly Power. In a free market, firms may gain monopoly power, this enables them to set higher prices for consumers. Government regulation of monopoly can lead to lower prices and greater economic efficiency. Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of sources.
The result is a loss of economic and social welfare. Market failure exists when the competitive out come of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole. Markets can fail because of: 1 . Negative externalities (e. G. The effects of environmental pollution) causing the social cost of production to exceed the private cost. 2. Positive (or beneficial) externalities (e. G. E provision of education and health care) causing the social benefit of consumption to exceed the private benefit 3. Imperfect information means merit goods are under-produced while demerit goods are over-produced or over- consumed 4. The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people’s needs and wants 5. Market dominance by monopolies can lead to under- production and higher prices than would exist under conditions of competition 6. Factor immobility causes unemployment hence productive inefficiency 7.
Equity fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change Market failure results in Productive inefficiency: Businesses are not maximizing output from given factor inputs. This is a problem because the lost output from inefficient production could have been used to satisfy more wants and needs Allocation inefficiency: Resources are miscalculated and producing goods and services not wanted by consumers. This is a problem because resources can be put to a better use making products that consumers value more highly