1.1.6 Free Market Economy

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1.1.6 Free Market Economy

Advantages

  • Efficiency - as any product can be bought or sold, only those of the best value will be in demand. So firms have an incentive to try to make goods in as efficient as a way as possible.
  • Entrepreneurship - in a market economy, the reward for good ideas can make entrepreneurs a lot of money which encourages risk-taking and innovation
  • Choice - the incentives for innovation can lead to an increase in choice for consumers
  • Consumers have freedom of choice, called consumer sovereignty.

Disadvantages

  • Inequalities - market economies can lead to huge differences in income and anyone who is unable to work in a free market would receive no income due to the lack of a welfare state.
  • Non-profitable goods may not be made - for example. drugs to treat rare medical conditions may never sell enough for a firm to make enough profit, so these would not be made. Lack of merit goods.
  • Monopolies - successful business can become the only supplier of a product - this market dominance can be abused.
  • There is the problem of externalities.

Evaluation

There are no completely free markets in the world today because the government has to intervene at least to an extent, for example by issuing money, protecting property rights and breaking up monopolies. Without this, the market mechanism could not work. 

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