Traits of Free Market Economy - Essay Example

Running Header: Free Market Economy Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Free Market Economy Free market economy is a system of economy whereby the individuals makes most to the decisions concerning the economic transactions and activities (Pricas, Jeff & Joan 2006, p.111). In this case, the government does not have as much influence on the economic activities of the country as the individuals have. A good example of such system is capitalism. Capitalism economic system makes use of private business firms and individuals in to do business in terms of production and the exchange of goods and services. In this case, a system of complex network that checks the markets and price is developed in a manner that it is able to cater for the interest of all the parties involved in that market. In free market economy, the private firms or individuals are the one responsible for making of economic decisions regarding policies that will help in accumulation of capital, the kind of expenses that would be involved in the market and how the available resources should be used. . Flow of income and output in free market economy (Thomson Learning, Inc 2002) According to Jeremy, Ahmad & Gurrib (2010, p. 71) the main principles that govern free market economy have their roots on promoting non intervention from the government. It is a principle that have been derived from laissez- faire which highly promotes lack of intervention by the government on matters of industrial or individual monetary affairs. It is a principle that was founded by the Scottish economist Adam Smith in 18th century. Smith strongly argued that whenever the individuals acted in the interest on their own economy, then they would be able to maximize not only their economic situation, but also that of the society they lived in. He further argued that the role of the government was to provide the public goods and perform regulations that promote this economy. The public goods are the basic things that enhance good relationship among individuals and helps in creating a level playing ground for the people involved in the market. In promoting free market economy, the role of the government is to offer education, ensure that there is law and order and ensure there are clear ways of defending and resolving conflicts that may arise between parties involved. Two major characteristics of free market economy are observed in this case. First, the consumption of product by a single person does not lessen the amount of good left for the others. Secondly, the gain that the individual gets does not depend on the contribution of that individual. A good example in this case is the use of a lift in a business building. The use of the lift by one person that is provided by the management of business building does not reduce the ability of other people from using it. Additionally, the owner of the business building cannot restrict the individuals from using the lift meaning that those who help in paying for the lift and those who do not will enjoy the same amount of the services from the lift. Those who enjoy the services without paying for it in the free market economy (free-riders) are the major hindrance of this economy. The role of the government in this case is to ensure that the free riders are eliminated. The government does this through collecting of taxes in exchange to provision of the public goods. The other role of the government in free market economy is to regulate economic activities, enforce contracts and protect the private property. Free market is prone to monopoly. The role of the government in this case is to put appropriate measures to ensure that there are regulations that prevent presence of such monopolies. The regulations come into place to ensure that monopolies do not make excessive profit at the expense of other companies. Moreover, the government may take up the responsibility of restricting the economic freedom in order to protect some individual rights. Examples in this case may include areas where there is business involving sale of unsafe goods, toxic emissions or when there is involvement of child labor. The main advantages of free market economy are that it encourages individuals and private companies to take the responsibility of making their own decision. Thus the market experiences economic freedom that is immune of politics. Additionally, free markets are more efficient economically. The free market does provide the motivation to people to allocate resources such as capital, labor in order to provide services and goods that the public is interested in, using a production means that is most efficient. The major disadvantages of free market economy is that it cannot ensure the basic social values like reducing poverty since the distribution of income generated from this market system is not equitable. Moreover, this market has the capacity of permitting the accumulation of large wealth and interest that is very powerful vested that may result to threatening of the political freedom. In a free market economy, the supply and demand are the determinants of price in the market. Where the market is competitive, the price of a given good will vary till it settles at the point whereby the amount of demand is equal to the amount of supply. This point is called the economic equilibrium of the quantity and price. Determinant of price in free market economy (Bunch 2011) Price intervention is one mechanism that is used by the government in order to shift the resource allocation mainly with the aim of improving social and economic welfare. Situations that may result to government intervening in price include To improve the economic performance To enable more equitable wealth and income distribution To correct or rectify market failure Richard, Stephen, & Jackson (2004 p. 37) observes that price intervention results to the shift of demand and supply curves in a certain direction. This in turn results to the shift of the equilibrium price. In this case, the free market economy principle would be affected since due to intervention, the price of the item in market is affected. Using this principal of price intervention, the government can be able to regulate the price and the way a certain commodity is sold or distributed in the market. Whether or not the intervention gives the desired results depends on the efficiency of the policy, effectiveness of the policy, equity effects of the intervention and the sustainability of the policies. The effects of intervention cannot be guaranteed to fulfill the objective for which it is intended for. The major determinant of intervention would be the nature of the market at the time of intervention. Therefore, the government intervention may not always results that the economic theory predicts that it should. In this case, intervention may result to government failure when unintended consequences results from intervention or the business behavior deviates from the intention of the government. In conclusion, free market economy is a system of economy that gives powers to individuals and private institutions to make major decisions about the market other than the government. The government is left with the role of provide public goods and offer regulations in the market. The individuals have the responsibilities of making their own decisions in free market economies but results to lack of equitable distribution of resources in the market. The price of commodity in free market economy is solely determined by the demand and supply of commodity in the market. However where intervention occurs, it shifts the supply and demand of the commodity therefore affecting its price. References Bunch, C, 2011, Supply, Demand, and what’s up with Gas Prices? Viewed 6 March 2012 < http://clarkbunch.wordpress.com/tag/gas-prices/> Jeremy M, Ahmad, S & Gurrib, M, 2010, ‘Explaining free market and its enemies’, Journal of Demand and Supply in Oil Industry, Vol. 1, no.1, pp. 68-73. Pricas, G, Jeff, M & Joan, 2006, W ‘Free Market Economy,’ The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory, Vol. 2, no. 2, pp. 96-120. Richard, J, Stephen, S & Jackson, D 2004, Inflation or Liberty, Elsevier, Sydney. Thomson Learning, Inc, 2002, The circular flow model of income and output, Viewed 6 March 2012, Read More