AS A Level Business: Benefits And Drawbacks Of A Free Market Economy

• Having examined the features of a Free Market Economy
• We will now examine the advantages and disadvantages of this economic system
• While it might not be said explicitly these benefits contrast with those of a command economy
• For the most part, the advantages of a free market economy are the disadvantages of the command economy
• The converse is also true as the disadvantages of the free market system are often the advantage of the command economy

Advantages

• A free market economy responds quickly to the needs are wants of customers
• There is no bureaucracy as opposed to command economies where the government has to consult widely before making a policy change
• A wide variety of products gives an opportunity for people to choose from
• There is an efficient/optimum allocation and use of resources
• Profit is a pretty strong motive that will inspire entrepreneurs to establish more businesses
• Businesses are free to innovate
• Business operations are informed by consumer desires i.e. there is consumer sovereignty

Disadvantages

• Some goods and services may not be produced for example merit and public goods
• Unemployment may result since only those with skills that are in demand are actively employed
• Social costs such as pollution can be ignored
• There is duplication of resources, for example, mobile network operations having base stations in the same area even if one would suffice
• Ultimately result in an unequal distribution of wealth
• Can lead to monopolies which might dominate the market, crush other businesses (their competitors usually) and eventually exploit consumers/customers
• There is not much incentive to act ethically at times

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