Advantages and Disadvantages of Free Market Economy
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. Decisions about what to produce are made by the people who will actually consume the goods. Planners are less likely to make the correct decisions across the whole economy. 2. Choice. In free market consumer sovereighnty prevails.
Firms will produce whatever consumers are prepared to buy not what they think they think they would like to buy. As consumer needs are going to be met with appropriate product than firms will make higherr profit and will last much longer in the market . Due to the free enterprise factor, there are no restrictions on what the firms can produce as a result there will be a much larger choice of goods and services in a free market economy compared with a command economy. The planner will be more concerned in making sure there are enough essential goods to produce the product they want to produce.
As firms in free market will be producing different good and services so consumers will have variety of good and sevices to choose from. 3. Innovation. Firms will always be looking to produce something new to get ahead of their competitors. , even though the government's role is limited, one of its jobs is to protect property rights. This will include intellectual property rights through patents. Hence, there are incentives in the free market system for firms to be innovative and produce better quality products. DISADVANTAGES OF FREE MARKET ECONOMY ( ADVANTAGES OF COMMAND ECONOMY
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Public, merit and demerit goods. Public goods cannot be provided privately because of their two characteristics, non-diminishability and non-excludability. These goods have to be provided publicly. Even in a very free market, one of the government's few roles will be to provide defence, for example. But there may be a problem with merit goods and demerit goods. Merit goods, like health and education, tend to be under provided in a free market. Certainly in the USA the public health system is a 'last resort' system. People are advised to buy health insurance.
Of course, the poor might not be able to afford this, and some people might simply decide not to bother if they feel particularly healthy. Demerit goods are bad for you. Government should ban class A drugs, and tax cigarettes and alcohol heavily. A government with a limited role might not take enough action in this area, causing health problems for the economy. Of course, the advantage of a command economy is that the strong government will make sure that public and merit goods are consumed at the right levels and that demerit goods are banned or taxed heavily.
The environment. Free market economies are likely to produce more pollution, which is bad for the environment. Command economies can make sure that the production processes that they chose are as environmentally friendly as possible. They should be able to make sure that the level of output is the socially optimal level of output. Governments can try to force firms into producing the socially optimal level of output through the use of taxes, but governments with a limited role will not be keen to use taxes.
Although the tax on petrol is high in the UK, it still doesn't cover the problems caused by the exhaust emissions (in health as well as the environment). Petrol prices have risen, but in real terms, the rise has not been as high as for bus and rail fares. In the USA, petrol is ridiculously cheap. The minimal tax on the good does not begin to cover the environmental damage. Having said all that, the command economies of the 80s had notoriously poor records on the environment. In theory, they should have been able to monitor pollution levels closely, given that they had control of production but this simply did not hapeen.
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