Explain_in_Detail_the_Principles_Underlying_the_Free_Market_Economy

The Free Market Economy also referred as Capitalism and Laissez- Faire, is a type of economic system, mostly dominant in the Western world, where, the production and distribution of goods and services are determined by invisible market forces of demand and supply. Thus, due to consumers and businesses deciding what they will purchase and produce, the allocation of resources and price will be determined by demand and supply rather than government intervention. In other words, producers decide what to produce, how much to produce, or what to pay employees, and not the government. It would certainly make sense to point out here how the price mechanism works and dictates the prices in the market economy. Usually, price goes down, if there is an excess supply of goods and services, while shortage of the same often leads to rise in prices. Suppliers can either control the supply of goods and services or prices but not both, and should accept lower prices if they supply too much as well as expect increase in demand if they reduce prices. On the other hand, consumers have the power and freedom to choose when to purchase or at what price, i.e if price is too high, they would be reluctant to buy, leading to fall in demand or vice versa. These market forces of demand and supply makes the market economy a very competitive one where both producers and consumers can benefit. Competitiveness is actually one of the main features of this type of economy, where consumers benefit from innovativeness, meaning quality products and value for money, while producers may enjoy greater profit. However, the market economy is not an ideal one as there are several drawbacks, which can affect consumers, producers and the whole economy to a great extent. In the first instance, for certain goods and services where there is no competition, producers may take advantage of consumers by charging high prices. For instance, when the sensational ipod music player was launched by Apple Company, the price was very high and only a small percentage of the population could afford it. Luckily, gradually with competition, the price came down. Secondly, as previously mentioned, competition leads to innovativeness and value for money. But if closely considered, it is a waste of resources as producers spend massively on advertisements and promotions to compete with other producers, rather than investing to produce better quality products, thus giving customers value for money. A good example is the market for electronic items, where consumers benefit from cheap prices, due to competition but very poor quality products with some producers offering very poor after sales service which can put a customer in situation where they have to pay high charges to repair the product, in case it goes faulty. Problems can also arise in the market economy if there are only a few producers for certain goods and services, where prices are then fixed by the producers associations rather than by price mechanism. This way of price fixing is against the anti-monopoly rules but in some sectors of the economy it can be difficult to prove that it exists, e.g in the UK care sector. In a free market economy, it can be very difficult to minimize social problems like divorce, illegal trafficking, pollution, etc. This is because of no government intervention and less responsibility on the part of producers towards social and welfare benefits of the whole population. In addition to, it may be equally very difficult under this type of economy to provide certain services effectively, e.g maintaining law and order, preventing crime and violence, defence, preventing environmental degradation, etc. The free market economy unfortunately can bring very high level of inequality in the society. For instance, if there are only a few producers for certain goods or services, prices would be normally high as they are fixed by these producers, thus making it difficult for poor people to afford them compare to those richer who can enjoy them easily. Looking at all the drawbacks of the free market economy, people may believe that the centrally planned economy is far better as prices are fixed by the government and decisions made by the same. But in reality, it is a mixture of both economies that work better for many countries, i.e the mixed economy. This economy prioritises public interest and equal distribution of income. It is worth to note that, while some countries claim to have adopted the free market economy, no economy is completely free in reality. So there is some degree of government intervention in the market economy. Producers, who would fix the price of their goods, would have never been existed if the government would not have given them the permission to invest in the country to start with. This control can take forms of planning permissions, licences, and criteria laid by the state e.g the investment should create job and minimum pollution in the environment. Moreover, the government intervenes periodically with the price mechanism, even if it is not fixing the market prices of goods and services. I believe, government intervention in the free market can prevent extreme inequality and minimize social cost.