Advantages and Disadvantages of a Free Market Economic System

An economic system refers to the way in which governments or societies are organized to facilitate the production, distribution, and exchange of goods and services. An economic system facilitates the utilization of factors of production such as land, labor and physical resources in the production and distribution of goods and services. It includes various institutions, agencies, producers and consumers, decision making processes, rules, and consumption patterns.

One of the three most common economic systems is the free market system. Others include command economy and mixed economy. A free market system occurs when markets are left to operate on their own with minimal interference from government. In a free market economy, the government exercises little control over businesses, and prices are determined by the market forces of demand and supply. A pure market economy does not really exist, but participants in a market economy are free to make most business decisions, including the prices to charge, amount of goods to sell, type of services to offer, how to distribute goods and services, etc.

There are several weaknesses, strengths, pros and challenges associated with a free market system. Some of the advantages and disadvantages of a free market system are explained below:

Advantages of a Free Market System

  1. There is the matching of demand and supply. Production takes place in response to demand hence a balance between what is produced and consumed. In this regard, there is no wastage of resources.
  2. There is flexibility of the market in responding to changes in demand and supply conditions thus variety products are offered.
  3. There are no resources wasted in planning as no planning is required in a free market system since market participants decide what to do on their own.
  4. Consumer sovereignty and competition gives rise to a wide variety of goods and services giving consumers a wide range to choice from.
  5. Higher rates of economic growth due to the incentive available for hard work which is motivated by profits.
  6. No wastage of resources on unrealistic projects because investment decision are based on profits.
  7. The costs associated with government bureaucracy are highly reducing encouraging entrepreneurship in the economy.
  8. Better quality products are produce due to innovation and inventions
  9. Intensive innovation and invention is prevalent due to competition.
  10. Affordable prices of products.

Disadvantages of a Free Market Economy

  1. Income inequality the ability of some people and firms to acquire excessive market power leads to greater inequality in income and wealth.
  2. There is likelihood of developing Monopoly powers whereby one firm controls the production and distribution of commodities.
  3. The price mechanism on its own cannot allocate resources to production of public goods e.g. schools, security etc.
  4. Instability in economy and unemployment. This is due to trade cycles, recession, depression, recovery and boom.
  5. The inability to deal with structural changes caused by wars, natural calamities among others.
  6. Inadequate provision of merit goods. Merit goods are goods of importance to the community such as health, education, security among others
  7. Due to excessive advertising consumers are likely to make irrational choices at the expense of moral life/health
  8. Over-exploitation of resources

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