Advantages of a Free Market Economy

No matter the type of economic system practiced in a society, it will bring about some advantages and disadvantages to the populace. The free market economy is not exempt from this as it offers certain advantages to countries that practice this economic system. The free market economy is one where commercial activities are mainly regulated through private measures. Hence, the market is driven by competitive bidding for goods and services and voluntary contracts. The price of goods and services is also determined by the extent of demand and supply rather than being fixed by the government.

In a free market economy, private property rights are in play instead of the communal ownership of property. People also have the freedom to determine the kinds of businesses they get involved in as well as who they do business with. The government’s role in a free economy is also often restricted to being an unbiased umpire to ensure that contracts are kept and that the prices of goods and services, especially necessities such as food, water, and clothing do not get bludgeoned beyond what citizens can afford. Here, the advantages of free market economy shall be discussed.

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Advantages of free market economy

1. Aids efficient allocation of resources
2. Encourages competition
3. Stimulates economic growth
4. Alternatives abound for consumers
5. Economic freedom
6. Limited government presence
7. Encourages innovation
8. Consumers drive the market
9. Promotes equality
10. Encourages entrepreneurship

Aids efficient allocation of resources

One advantage of the free market economy is that it aids the efficient allocation of resources by companies operating within the society. They will have to allocate resources to products or services that bring the most benefits to the company with the aim of increasing the effective use of their capital and human resources. Companies that are into the manufacturing of various products or the rendering of services, will have to ascertain which product or products, or service or services bring more sales to the company. By so doing, they can determine which product or service to dedicate more resources to and which product or service to reduce resources from or stop allocating resources altogether.

Moreso, since most companies exist for-profit, they often create better production techniques that will reduce their production cost and increase their profits. Hence, in a free market economy, inefficiencies are prevented through the efficient allocation of resources in the production process as businesses adapt adequately to efficiently use the resources at their disposal.

Encourages competition

A major advantage of a free economy is that it stifles monopoly by encouraging competition between the various producers that are present in the market. There is often a proliferation of businesses that offer similar products and services in this kind of economy. This makes the various companies employ several methods of marketing such as identity-based marketing in order to focus their marketing efforts on a particular group of consumers.

Organizations also focus their resources on making products and services that meet the exact needs of their targeted demographics. This is done to ensure that their products and services stand out among those that other producers within the same industry offer. For instance, in order to meet the need of customers who are dieting but still want to have a drink of Coca-Cola, the company produces diet Coke to meet that need. Additionally, since the company operates in a free economy, other soda producers such as Pepsi also have a similar product available to dieting customers, diet Pepsi. Hence the free market encourages competition and is clearly an advantage of a free economy.

Stimulates economic growth

A study by the Heritage Foundation found that countries that are economically free tend to have greater per capita wealth when compared to countries that practice other economic systems such as the command economy which is often associated with communism. Since the companies in existence in the free market have the growth of their business as a top priority, it further goes to stimulate the overall economic growth of the society in which they operate. As companies produce goods and services to meet varying demands and needs within society, the populace also spends money on purchases.

Whether the sales made by companies are cash or credit sales, the bottom line is that at the end of the accounting season, it will culminate into an increase in the company’s revenue irrespective of whether it is revenue from the sales of products or revenue from the services rendered to consumers by the company. As money keeps changing hands from consumers to manufacturers, economic activities receive a boost. The employees of the company also get paid their salaries. Thus, it becomes a cycle of increasing wealth throughout the economy. Therefore, practicing the free economic system brings the advantage of economic growth to society.

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Alternatives abound for consumers

One of the advantages of the free market system is that it provides consumers with a lot of alternatives when it comes to buying products or services. This is made possible because of the key characteristics of the free economy whereby competition is prevalent among the producers and the fact that there are limited restrictions imposed on consumers or producers by the government. Since several companies operate in a free market with a lot of them operating within the same sector, there is an availability of diverse products to the consumers.

For instance, when consumers want to buy toothpaste, they have the option of choosing from a wide range of toothpaste that are made available by different producers such as Crest, Colgate, Sensodyne, Aim, Close-Up, Pepsodent, etc.

Economic freedom

Another advantage of the free market economy is that producers and consumers enjoy economic freedom. Economic freedom means that business owners are free to choose and decide how they will operate such as choosing their business terms, rules and regulations, operating hours, prices, products, and services to offer. Consumers are also free to choose what products or services to buy and from whichever vendor they want to buy from.

Furthermore, all citizens are allowed to choose their career path and can seek and get employed anywhere within society. They can further decide to quit their job if they so desire. No one dictates how individuals living in a free market economy should spend their money or the kinds of jobs they should take. In simple terms, a free market economy offers all citizens the advantage of having freedoms that allow them to be themselves, make personal choices, and utilize their resources in any way they deem fit.

Limited government presence

A major advantage that both business owners and consumers enjoy in a free economy is that the government does not interfere in daily business activities. This means that business owners have the freedom of operating their businesses in ways that are most profitable to them. The government’s limited presence in the market means that sales and purchases can be easily carried out without long and unnecessary bureaucracy. This further increases productivity and reduces administrative costs to companies which in turn serves in keeping the prices of goods and services affordable to the populace.

A free market economy is often self-regulated, demand and supply generally drive the market. This means that the choices made by the private sector which includes the producers and consumers enable the functioning of the economy. More often than not, manufacturers produce goods and provide services that are in demand. Consumers on the other hand make purchases from companies that best meet their demands. The government often only serves to ensure that products and services meet the required standards and that contracts that are initiated get completed by the parties involved.

Additionally, all businesses that do not serve the best interest of society such as human trafficking, sales, and purchases of hard drugs, arms, and ammunition, etc. are considered illegal. A free economy cannot exist if people’s choices are tampered with, hence countries like the United States have enshrined concepts such as freedom of speech and other freedoms into their Bill of rights and Constitution to protect the existing concepts of capitalism and curtail unexpected shifts in economic conditions that will be a disadvantage to its citizens.

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Encourages innovation

Another advantage of a free market economy is that it encourages innovation by service providers and goods manufacturers. Since the government does not dictate what products or services businesses can offer to the populace, it gives companies the freedom to come up with new ideas that will result in new or improved products and services. Generally, businesses that exist in a free market constantly make research to keep up with customer needs and demands as well as popular trends within society. The presence of several products and service providers further drives innovation since competition is often stiff between companies that produce similar products.

These companies continually try to provide better products and services to consumers so as to outdo their competitors in the industry. This often leads to consumers being offered good value for their money as the companies know that if they do not offer quality products or services, their competitors will get better patronage than them. For instance, the iPhone manufacturer, Apple, constantly upgrades their phone’s features to meet up with customer demands and also remain a leading brand in the market among other phone producers.

Consumers drive the market

An advantage of a free market economy to consumers is that they drive the market because they are the ones who ultimately decide which products and services succeed and which ones fail. This is so because they consumers are constantly presented with diverse products and service offerings and are left to decide which products to spend their money on. Although the manufacturers and service providers price their goods how they deem fit and in a way that will bring profit to them, they usually have to consider their target customers when pricing products and services.

This is due to the fact that when the price of a good or service is considered expensive by consumers, it often translates to little or no purchase of the expensive product or service. Customers are therefore the judge and the jury of products and services in this economic system. The products and services they purchase will thrive while those they do not purchase will not. Hence, consumers determine which companies will continue existing in the market and which ones will fail and exit the market.

Promotes equality

When the market in a given society is free, it naturally promotes equality among the members of the society. This is so because there is no undue advantage to any individual or corporate entity. All citizens of the society are presented with equal opportunities when it comes to taking part in the buying and selling that goes on in the free market. Anyone irrespective of their background, religion, social class, or status can achieve any level of success they want based on their ability to utilize the resources at their disposal and to engage the market in a way that brings the maximum benefit to them.

Encourages entreprenuership

One of the advantages of a free market is that it encourages entrepreneurship. Since there is usually no restriction on who can start a business, anyone who has ideas on how to meet the needs of people in the society can translate their ideas into products or services that will meet those needs. Economic freedom which is a basic part of the market also aids entrepreneurship since individuals can invest their monies into any business that they want without coercion or pressure from the government.

The regular emergence of new companies further ensures that the products and services that thrive in the market are of increasingly high quality. Low-quality products and services will generally not survive the increasing competition made prevalent through the improved products and services that new entrepreneurs constantly offer. This is made possible by the ease of starting or closing a business in a free economy.

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The advantages offered by a free market economy are numerous as we have discussed above. The competition present in such markets usually makes the products and services offered to be of high quality and at affordable prices. The limited government interference and economic freedom boost innovation, encourage entrepreneurship and give a level playing ground for all citizens to be able to implement their ideas and create products or services that meet the needs of their target customers.

Demand, supply, and the prices of goods and services also have a close relationship in a free economy. As the demand for certain products increases, it usually results in an increase in price whereas a fall in demand often results in a decrease in price. In addition to the business models employed by business owners and their efficient use of resources to sustain profitability, consumers also play a big role in determining businesses that succeed and those that fail. They do so by their purchasing power; businesses that get patronized survive while those that are not patronized usually fail.

Last Updated on November 3, 2023 by Nansel Nanzip Bongdap