In a free market economy, the production and sale of goods and services are promoted without much control or involvement from any central government agency. Prices in this kind of economy is not dictated by the government but is determined by supply and demand. In short, free market economies are offered a wide range of freedoms because the government doesn’t intervene one bit. However, no matter how good a free market economy may sound, it does have some drawbacks. Here’s a look at the pros and cons of a free market economy.
List of Pros of Free Market Economy
1. It drives innovation
A free market economy opens the door wide for innovation, which is highly important for businesses. Through this kind of economy, business owners can develop new products and services without much intervention from the government. They can create what they see is fit for the public based on consumer demands and popular trends. As such, they can provide consumers with what they need.
Innovation also drives competition. As such, products will only get better as companies try to improve upon previous models in order to best the competition.
2. It is powered by the customers
The success or failure of a product lies in the hands of customers. When they like it, they will demand more of it. If they don’t, then there won’t be any clamor for it. This is best demonstrated in products or services that are similar. It’s pretty clear which one is preferred based on sales results.
Customers also provide the deciding factor when it comes to pricing. Producers set a certain amount but customers decide which one is best based on quality and affordability.
List of Cons of Free Market Economy
1. It is a profit-driven economy
Profit is good for business. But businesses that are so focused on profit often forget the bigger picture: that there are employees working hard to make a product. Sometimes, businesses neglect their workers just for the sake of earning greater rewards. The health of employees is neglected because they have to produce a good product to earn bigger sales.
Sometimes, even environmental standards are forgotten just so a business can earn money. Take the Deepwater Horizon oil spill in 2010 which is the subject of a Hollywood film coming out this year. It is considered the largest environmental disaster in the history of the US and the catastrophe was traced to cost-cutting measures like using substandard cement.
2. It causes devastating results when it fails
There are severe consequences whenever a market fails. We can only look at history for evidence: the Great Depression of the 1930s and the real estate crash of 2008 are two good examples. It wasn’t just one country that was affected – it was the whole world. People lost not just their jobs but also their homes. While some have managed to get back up on their feet, some have taken longer to recover.
There are products and services that won’t perform well in a free market economy. As such, there needs to be government services or regulation to ensure not everything falls apart.
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to reach out to contact Natalie, then go here to send her a message.