Q1. In the light of present adoption of economic liberalism in many developing countries, what are the possible shortcomings of relying in the free market and on the forces of competition from the standpoint of income distribution?
Introduction
Market economy o free market economy functions primarily depending upon the forces of the market, namely demand and supply. The institution of the market allocates and distributes commodities based on the principle of price determined by the interaction of the forces of the market. Price of a commodity generally shoots up when its demand exceeds supply and when the reverse occurs, it is generally associated with price cuts of the good in question. Therefore, in the free market system, a successful business makes a consistent profit in a field of competitors. The concept of competition is an important component of a free market system. Competition in the marketplace provides the best possible product to the customer at the best price. When a new product is invented, it usually starts out at a high price, once it is in the market for a period of time, and other companies begin to copy it, the price goes down as new, similar products emerge. In a competitive market, the poor versions of the product or the overpriced will be pushed out of the market because consumers will reject them. The free market system determines the winners and losers in each industry based on the demands of the customer, whether industrial, business customers, or consumers, people who buy for personal use.
Discussion
One of the main downsides of a market economy is the fact that it can become so competitive that smaller companies cannot compete with the bigger brands and so on. In this case, a company can thrive on creating new products but due to the high amounts of revenue they are making, they become the market leader and other companies do not have the chance to compete. This can be very detrimental towards companies who are struggling to get by in the industry.
A free market system tends to give rise to the development of ·monopolies. A monopoly refers to a market situation where there is only one supplier. Monopolies tend to arise because modem technology has made it possible for large-scale producers to obtain many economies of scale. Private monopolies can potentially exploit the consumer through high prices and low quality.
In a free market economy externalities are not taken into account. Externalities refer to social costs and benefits which are not fully accounted for in the market system. In a free market system the focus is on private costs and benefits. This gives rise to social costs such as pollution and noise which lead to reductions in welfare of people experiencing these costs by, say, living near a factory.
A free market economy may not produce public goods. Public goods are those commodities characterized by non-excludability and non-rivalry in consumption. Non-excludability implies that it is not possible to exclude individuals who have not paid from consuming the commodities. Non-rivalry in consumption implies that one person’s consumption does not reduce the consumption of another individual. Examples of public goods are street lighting and defense. The problem of the provision of public goods by the private sector arises because of the free rider problem. The free rider problem leads to potential customers understating their preferences or willingness to pay and still gaining since they receive the good without necessarily paying for it. Such individuals gamble on the good being provided to others who will express some willingness to pay.
A free market economy systematically under provides for merit goods like health and education. Merit goods are those commodities which are socially desirable in a system where the price mechanism allocates resources merit goods will be provided in inadequate quantities and would be too expensive for the vast majority of the population.It is argued that in a free market economy certain socially undesirable goods and services known as demerit goods such as drugs and alcohol may be produced. This is because the demand for such commodities exists and they may be profitable to provide.
A free market economy is likely to generate considerable inequalities in income and wealth. This is because where the price mechanism operates in factor markets the wages and salaries earned will depend on the forces of demand and supply. Those whose skills are in demand will therefore command much higher remuneration than those whose services are in low demand. It is argued that a free market system subjects an economy to cyclical employment when production and consumption decisions get out of line. Labor market imperfections may also result in a form of unemployment known as structural unemployment.
Conclusion
In reality there are no perfect free market economies. Even in developed countries like USA considered to be champions of free market, there are many areas of government control. For example there are laws intended to check unfair trade practices. Also there are considerable restriction on what can be imported and how much quantities through the mechanism of import quotas and tariffs. Then there are provisions like anti dumping laws. This proves that free economy has its advantages. Major problem is that to be most effective it needs some ideal environmental conditions like full, free and instantaneous availability of all relevant information to all buyers and sellers. It also requires complete freedom to manufacturers from one industry to another. Perfect conditions like these are possible only in theory. Lack of these ideal condition makes free market mechanism ineffective in many ways. Thus monopolies and oligopolies develop, that may act against the interest of the consumer.
Additional materials about competition
Competition for work drives down the income for most jobs. When there is an oversupply of potential employees for a particular type of work, and the alternative is unemployment, competition will drive wages down to subsistence levels, and working hours will expand. Those who might miss out on work will be willing to accept less to obtain a job. In a perfectly competitive market, the level of wages for a particular type of labour will tend to equate to the cost of reproducing the labour. For workers without special skills, this means wages that are just enough to feed and clothe them so that they can continue working. This was the outcome during the industrial revolution before governments legislated minimum wages and the maximum hours that could be worked for those wages[5]. Even the salary levels of jobs that require extensive university qualifications will be driven down by competition if there is free access to obtaining the qualifications. When there is an undersupply, higher salaries will attract more people to get the qualifications. But once this satisfies demand, competition will tend to force salaries down to the minimum level needed to reproduce the employees and their qualifications.
Competition also tends to produce work that is meaningless and unfulfilling for workers. Competition amongst businesses will force employers to organise work and design jobs to maximize efficiency. They will not be able to structure work in ways that produce satisfying and meaningful work for employees where to do so would conflict with maximum efficiency. Competition between potential employees will mean that they have to accept what is offered. The result is that large numbers of employees in market economies spend their working life doing tasks in which they find no meaning, that are achingly boring, and that prevent them from developing their potential as human beings. Many workers in modern market economies have less freedom in their life to pursue their own interests and personal development than slaves in earlier times. Large parts of their life are taken up doing things that they would never freely choose to do[6]. This is an inevitable outcome of ungoverned (unmanaged) markets.
Competition amongst the producers of goods and services drives down their profit margins. No one makes much money out of businesses that are subject to strong competition. In areas of business where anyone can get the knowledge and capital to operate, competition in a free market system will force down profits to subsistence levels. This is commonly the case where there is no regulation of taxi services, corner shops, street vendors and other small businesses. It is only in circumstances where vigorous and open competition does not exist to drive down profitability that great wealth can be accumulated and that the massively unequal distribution of wealth found in modern market economies emerges. It is only when there are business opportunities that most people are unable to exploit that very high incomes are produced.
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]