THE ADVANTAGES OF FREE MARKET ( DISADVANTAGES OF COMMAND ECONOMY ) 1.Efficiency. Free market economies are very competitive. Most of their industries are assumed to be perfectly competitive and so allocative and productive efficiency will occur.As their main aim is profit motive so free market economies allocate their resources more efficiently as compared to planned economy. Market economy is based on supply and demand where the prices of goods and services are determined within a free price system. The advantages and disadvantages of market economy are described briefly below. The United States is a mixed economy where both the free market and government play important roles. A regulated economy provides the following advantages: It looks out for the safety of consumers. A free market economy is a type of economy that promotes the production and sale of goods and services, with little to no control or involvement from any central government agency. In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced, and who buys the goods. Market economy or free market economy functions primarily depending upon the forces of the market, namely demand and supply. The institution of the market allocates and distributes commodities based on the principle of price determined by the interaction of the forces of the market.
- Advantages Of A Free Market Economy Quizlet
- Benefits Of Free Market Economy
- Market Economy Advantages And Disadvan…
Economic Models
- Capitalism
- Socialism
- Mixed Economy
- Reaganomics
- Trickle Down Economics
- Market Economy
- Traditional Economy
- Communism
- Command Economy
How the U.S. Constitution Protects America's Market Economy
A market economy is a system where the laws of supply and demand direct the production of goods and services. Supply includes natural resources, capital, and labor. Demand includes purchases by consumers, businesses, and the government.
Businesses sell their wares at the highest price consumers will pay. At the same time, shoppers look for the lowest prices for the goods and services they want. Workers bid their services at the highest possible wages that their skills allow. Employers seek to get the best employees at the lowest possible price.
Capitalism requires a market economy to set prices and distribute goods and services. Socialism and communism need a command economy to create a central plan that guides economic decisions. Market economies evolve from traditional economies. Most societies in the modern world have elements of all three types of economies. That makes them mixed economies.
Six Characteristics of a Market Economy
The following six characteristics define a market economy.
- Private Property. Most goods and services are privately-owned. The owners can make legally-binding contracts to buy, sell, or lease their property. In other words, their assets give them the right to profit from ownership. But U.S. law excludes some assets. Since 1865, you cannot legally buy and sell human beings. That includes you, your body, and your body parts.
- Freedom of Choice. Owners are free to produce, sell, and purchase goods and services in a competitive market. They only have two constraints. First is the price at which they are willing to buy or sell. Second is the amount of capital they have.
- Motive of Self-Interest. Everyone sells their wares to the highest bidder while negotiating the lowest price for their purchases. Although the reason is selfish, it benefits the economy over the long run. This auction system sets prices for goods and services that reflect their market value. It gives an accurate picture of supply and demand at any given moment.
- Competition. The force of competitive pressure keeps prices low. It also ensures that society provides goods and services most efficiently. As soon as demand increases for a particular item, prices rise thanks to the law of demand. Competitors see they can enhance their profit by producing it, adding to supply. That lowers prices to a level where only the best competitors remain. This competitive pressure also applies to workers and consumers. Employees vie with each other for the highest-paying jobs. Buyers compete for the best product at the lowest price. There are three strategies that work to maintain a competitive advantage.
- System of Markets and Prices. A market economy relies on an efficient market in which to sell goods and services. That's where all buyers and sellers have equal access to the same information. Price changes are pure reflections of the laws of supply and demand. There are five determinants of demand.
- Limited Government. The role of government is to ensure that the markets are open and working. For example, it is in charge of national defense to protect the markets. It also makes sure that everyone has equal access to the markets. The government penalizes monopolies that restrict competition. It makes sure no one is manipulating the markets and that everyone has equal access to information.
Four Advantages of a Market Economy
Since a market economy allows the free interplay of supply and demand, it ensures that the most desired goods and services are produced. Consumers are willing to pay the highest price for the things they want the most. Businesses will only create those things that return a profit.
Second, goods and services are produced in the most efficient way possible. The most productive companies will earn more than less productive ones.
Third, it rewards innovation. Creative new products will meet the needs of consumers in better ways that existing goods and services. These cutting-edge technologies will spread to other competitors so they, too, can be more profitable. This illustrates why Silicon Valley is America's innovative advantage.
Fourth, the most successful businesses invest in other top-notch companies. That gives them a leg up and leads to increased quality of production.
The Disadvantages of a Market Economy
The key mechanism of a market economy is competition. As a result, it has no system to care for those who are at an inherent competitive disadvantage. That includes the elderly, children, and people with mental or physical disabilities.
Second, the caretakers of those people are also at a disadvantage. Their energies and skills go toward caretaking, not competing. Many of these people might become contributors to the economy's overall comparative advantage if they weren't caretakers.
That leads to the third disadvantage. The human resources of the society may not be optimized. For example, a child who might otherwise discover the cure for cancer might instead work at McDonald's to support her low-income family.
Fourth, the society reflects the values of the winners in the market economy. A market economy may produce private jets for some while others starve and are homeless. A society based on a pure market economy must decide whether it's in its larger self-interest to care for the vulnerable.
If it decides it is, the society will grant the government a significant role in redistributing resources. As such, there are so many mixed economies. Most so-called market economies are mixed economies.
How the Constitution Protects the U.S. Market Economy
The United States is the world's premier market economy. One reason for its success is the U.S. Constitution. It has provisions that facilitate and protect the market economy's six characteristics. Here are the most important:
- Article I, Section 8 protects innovation as property by establishing a copyright clause.
- Article I, Sections 9 and 10 protects free enterprise and freedom of choice by prohibiting states from taxing each other’s goods and services.
- Amendment IV protects private property and limits government powers by protecting people from unreasonable searches and seizures.
- Amendment V protects the ownership of private property. Amendment XIV prohibits the state from taking away property without due process of law.
- Amendments IX and X limit the government's power to interfere in any rights not expressly outlined in the Constitution.
The Preamble of the Constitution includes a goal to 'promote the general welfare.' The government could take a larger role than what a market economy prescribes. This led to many social safety programs, such as Social Security, food stamps, and Medicare.
The Bottom Line
A market economy functions under the laws of supply and demand. It is characterized by private ownership, freedom of choice, self-interest, optimized buying and selling platforms, competition, and limited government intervention.
Of these hallmarks, competition mostly defines the market economy, and it’s a two-sided coin. On the plus side, it fosters innovation, efficiency, and quality in the production of goods and services. Unfortunately, it marginalizes those that are unable to contend such as children, the elderly, the sick, and those who care for them. Competition often creates income inequality. The U.S. constitution has laws that protect America’s market economy.
Article Table of Contents Skip to section
- Six Characteristics of a Market Economy
- The Disadvantages of a Market Economy
- How the Constitution Protects the U.S. Market Economy
Table of Contents
- Free Market Economy
- The Regulated Economy
- The Bottom Line
The U.S. economy is essentially a free market economy – an economic market that is run by supply and demand – with some government regulation. In a truly free market, buyers and sellers conduct their business without any government regulation, but there is a continuing debate among politicians and economists about how much government regulation is necessary for the U.S. economy.
Those who want less regulation argue that if you remove government restrictions, the free market will force businesses to protect consumers, provide superior products or services, and create affordable prices for everyone. They believe that the government is inefficient and creates nothing but a big bureaucracy that increases the cost of doing business for everyone.
Those who argue that government regulations are necessary to protect consumers, the environment and the general public claim that corporations are not looking out for the public's interest and that it is precisely for this reason that regulations are required.
In this article, we consider the pros and cons of a completely free market versus a market with some government regulation.
Key Takeaways
- Economists and policymakers have long argued over how open or restrictive economic and trade policy should be.
- Free markets are theoretically optimal, with supply and demand guided by an invisible hand to allocate goods efficiently.
- In reality, however, free markets are subject to manipulation, mis-information, asymmetries of power & knowledge, and foster wealth inequality.
- Regulation is aimed at balancing free market's virtues against its pitfalls.
Free Market Economy
In its purest form, a free market economy is when the allocation of resources is determined by supply and demand, without any government intervention.
Supporters of a free market economy claim that the system has the following advantages:
- It contributes to political and civil freedom, in theory, since everybody has the right to choose what to produce or consumer.
- It contributes to economic growth 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.
Critics of a free market economy claim the following disadvantages to this system:
Advantages Of A Free Market Economy Quizlet
- 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.
- Assumptions required for free markets to operate well are inconsistent with reality such as the myth of perfect and symmetric information, rational actors, and costless transactions.
Triumphs and Tribulations
There are several historical examples that suggest that the free market works. For example, the deregulation of AT&T, which previously functioned as a regulated national monopoly, in the 1980s provided consumers with more competitive telephone rates. Also, the deregulation of U.S. airlines in 1979 provided consumers with more choice and lower air fares. The deregulation of trucking companies and railroads also increased competition and lowered prices.
Despite its successes, there are also several historical examples of free market failure. For example, since the cable industry was deregulated in 1996, cable TV rates have skyrocketed; according to a 2003 report by the U.S. Public Interest Research Group (PIRG), cable rates increased by more than 50% between 1996 and 2003. Clearly, in this case of deregulation, increased competition did not reduce prices for consumers.
Another example of free market failure can be seen in environmental issues. For example, for years the oil industry fought and defeated laws requiring double-hull oil tankers to prevent spills, even after the single-hulled oil tanker Exxon Valdez spilled 11 million gallons into Prince William Sound in 1989. Similarly, the Cuyahoga River in Northeast Ohio was so polluted with industrial waste that it caught fire several times between 1936 and 1969 before the government ordered a $1.5 billion cleanup. As such, critics of a free market system argue that although some aspects of the market may be self-regulating, other things, such as environmental concerns, require government intervention.
The Regulated Economy
Regulation is a rule or law designed to control the behavior of those to whom it applies. Those who fail to follow these rules are subject to fines and imprisonment and could have their property or businesses seized. The United States is a mixed economy where both the free market and government play important roles.
A regulated economy provides the following advantages:
Benefits Of Free Market Economy
- It looks out for the safety of consumers.
- It protects the safety and health of the general public as well as the environment.
- It looks after the stability of the economy.
The following are disadvantages to regulation:
- It creates a huge government bureaucracy that stifles growth.
- It can create huge monopolies that cause consumers to pay more.
- It squashes innovation by over-regulating.
Some historical examples that show how well regulation works include the ban on DDT and PCBs, which destroyed wildlife and threatened human health; the establishment of the Clean Air and Water Acts, which forced the cleanup of America's rivers and set air quality standards; and the creation of the Federal Aviation Administration (FAA), which controls air traffic and enforces safety regulations.
Several historical examples of regulatory failures include:
- In response to the Sarbanes-Oxley Act of 2002 (SOX), an act written in response to accounting scandals, many companies decided it was too cumbersome to list in the United States and decided to do their initial public offerings (IPOs) on the London Stock Exchange (LSE) where they didn't have to worry about Sarbanes-Oxley.
- The coal industry has so many regulations that it is more profitable to ship coal overseas than to sell it domestically.
- Many labor and environmental regulations force businesses to move jobs off shore, where they can find more reasonable regulations
Finding a Balance
There is a delicate balance between an unregulated free market and a regulated economy. The following are some examples in which it appears that the U.S. Cafta fault tree analysis software. has struck a good balance between the two:
- The Federal Deposit Insurance Corporation (FDIC) was created after the Great Depression. The FDIC insures depositors' money so that even if banks fail, the depositors won't lose their deposits.
- The Securities and Exchange Commission (SEC) regulates the stock markets, ensures honest disclosure on all stock transactions and fights insider trading.
- The ban on CFCs prevents the destruction of the ozone layer.
Several ways in which the economy has become out of balance as a result of deregulation include:
- The deregulation of the savings and loan (S&L) industry in 1982 led to fraud and abuse, causing the federal government to spend $500 billion to stabilize the industry after 650 S&Ls went under.
- Improperly trained crews led to the near meltdown of a nuclear reactor at Three Mile Island, which released radiation into the air and water. Gordon MacLeod, the secretary of state for Pennsylvania, was fired for voicing his concerns about the lack of oversight of the nuclear industry and the inadequate preparedness of the state to respond to such emergencies.
- The lack of adequate regulation of silicone breast implants led to a situation in which manufacturers knew that the implants leaked but continued to sell them anyway, leading to a settlement of $4.75 billion to 60,000 women affected in 1994.
The Bottom Line
Market Economy Advantages And Disadvan…
Free market economics aren't perfect, but neither are completely regulated economies. The key is to strike a balance between free markets and the amount of government regulation needed to protect people and the environment. When this balance is reached, the public interest is protected and private business flourishes.