Advantages and disadvantages of free market economies

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Advantages and disadvantages of free market economies

This is a detailed analysis of some of the advantages and disadvantages of free market economies. A free market is an economic system in which a country’s capital, goods, and services are allowed to circulate freely. However, it lacks some of the safety nets that planned economies offer their citizens in case the economy crashes suddenly.

 

What is a free market economy?

A free market is an economy in which a substantial part of the economic activity is organised through free markets, in which the parties choose the quantities, and prices are traded without central direction (Oxford University, 2022).

 

Free markets are also called laissez-faire economies. These markets operate with little or no regulation (IMF, 2022). They rely on two key factors to function: supply and demand. In these environments, if people want to buy something, then someone will find a way to supply it. The government plays a minimal role. It simply enforces laws that allow trading of goods and services — such as rules on property rights, and liability for damages.

 

Characteristics of free market economies

No or limited government control

People and companies are free to decide how much to produce and who to sell to. No centralised planning or economic control is done by the government. Free market economies do not require as much oversight from governments as planned economies do.

 

Private ownership of resources

In free markets, a substantial portion of resources are owned by individuals or companies in the private sector which enables the legal owners to implement a total control over the means of production, allocation of resources, and exchange of products.

 

Competition

Free market economies encourage competition between companies. This results in products and services being offered with better quality at lower prices.

 

Advantages of free market economies

As the competition between businesses is fierce, free market economies are more likely to produce better quality and cheaper goods and services than control economies do.

 

A free market economy does not restrict who can own or operate a business or how much capital people can invest in different businesses. This means anyone — from large companies to small family-owned businesses— can compete equally against one another with no unfair advantages from certain types of companies or investors over others.

 

Free market economies support creative ideas and innovation. Organisations invest heavily on innovation to gain competitive advantages over each other. Consequently, consumers benefit from new products and services.

 

In free markets, demand, supply, and prices work in line with each other. When demands fall, manufacturers need to produce less, or reduce their prices. Likewise, they may have to come up with new products and services resulting in more options for consumers.

 

Disadvantages of free market economies

In a free market economy, prices are determined by supply and demand. This means that there is a risk of asset bubbles forming, which are sudden inflation in prices of certain assets.

 

A free market economy relies on price signals to determine who to buy from and who to sell to. If there is any problem in these signals, it may experience financial crises.

 

As government control does not exist or is very limited, consumers may suffer from the impacts of monopoly in free market economies. Market entry barriers are massive in some industries such as utility and train services. As potential entrants find it difficult to enter those markers, existing companies may dominate the market and charge consumers extortionate amount of money.

 

The unregulated flow of goods and services may lead to environmental damages. When demands go up, suppliers focus more on making the products/services available than on their impact on the environment.

 

According to some critics cited in Orlitzky (2022) some competitors may try to collude in free market economies potentially resulting in higher prices or smaller choices for consumers. Collusion in this context refers to a secret and fraudulent agreement between interested parties.

 

Free market economy examples

Economics literature is full of discussions and analysis of the ideas of free market economies. However, do they exist in real world? The answer is mostly negative. Very few if any economies are either purely free-market-based or centrally planned; most have substantial elements of each (Oxford University, 2022).

 

No country in the world has a fully free market economy in pure sense of the terms. The key discussion is how free an economy is. The United States is one of the largest free market economies, however, it has several regulations concerning many industries.  Other widely considered free markets are Hong Kong, Singapore, New Zealand, Australia, Switzerland, the United Kingdom, Canada, and Ireland (Robinhood, 2022).

 

To defend the position of branding the USA as a free market economy, some analysts say that the country has a federal government that plays a minimal role in the economy. It has a private sector that is largely unregulated and a public sector that plays a role in maintaining infrastructure such as transportation, communication, and power plants. It also allows goods and services to flow freely between states and between the public and private sectors. However, critics would argue that both businesses and individuals need to follow rules and regulations in different industries.

 

Summary of the advantages and disadvantages of free market economies

Thus, it is clear that free markets have their own advantages and disadvantages. There are some countries in the world such as USA, and UK that are widely regarded as free markets. However, critics point out that government interventions are not uncommon in those economies.

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Last update: 24 June 2022

References:

IMF (2022) What is capitalism, available at: https://www.imf.org/external/pubs/ft/fandd/basics/2_capitalism.htm (accessed 24   June 2022)

Orlitzky, M. (2022) Free market, available at: https://www.britannica.com/topic/free-market (accessed 22 June 2022)

Oxford University (2022) Free market economy, available at: https://www.oxfordreference.com/view/10.1093/oi/authority.20110803095834373 (accessed 24 June 2022)

Robinhood (2022) What is a free market economy? available at: https://learn.robinhood.com/articles/7Ium1gWWf54wd5wqr1XosD/what-is-a-free-market/ (accessed 23 June 2022)

Author: Joe David

Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.