The Advantages & Disadvantages of a Market Economy

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A market economy is one in which the production and distribution of goods and services is uncontrolled, or only lightly controlled by a central government. The free exchange of goods and services between private individuals or groups of individuals proceeds largely unhindered and prices and production levels are left to the law of supply and demand. Whilst the merits or otherwise of a market economy, or the free market, often depend on ideology or self-interest, there are clear advantages and disadvantages with such an economic system.

Divisions

  • One of the clear disadvantages of a market economy is the social and capital divisions created by the open and competitive nature of the free market. As people have vastly differing abilities and motivations, over time the market economy tends to see an ever-increasing concentration of wealth in fewer and fewer hands. It becomes self-fulfilling as the more wealth someone has the easier it is to acquire even more private wealth, while those without become more and more unable to compete with the former group.

Efficiencies

  • Perhaps the clearest advantage of a market economy are the efficiencies required to operate in a highly competitive economic environment. If something doesn't work well it is not bought and a profit is not made. It is therefore imperative to improve it or discontinue it, as consumers will purchase a competitor's better performing product or superior service. The commercial imperative drives a relentless quest for improvements, refinements and efficiencies.

Niches

  • In a market economy, the entrepreneurial spirit thrives. As there is the incentive of great reward for fulfilling the needs of the market, much human endeavour goes toward identifying and meeting these needs. Some of these needs may be quite specialized or niche and not catered to in more planned economies, for example: products for left-handed people. But in a market economy these needs will be fulfilled simply because a profit can be made by meeting the demand.

Effects

  • A disadvantage of a market economy is that sometimes some of the flow-on effects of profit-seeking economic activity can be injurious to other individuals or groups. In a loosely regulated market economy what may be good or profitable for an individual, company or group of companies may not be good for many others. For example, it can be costly for a producer to minimize the negative environmental effects of his activities. If these negative effects do not immediately affect profits and there is no regulatory requirement to minimize them, then there is no incentive to implement them.

References

  • Photo Credit Thomas Northcut/Photodisc/Getty Images
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