Question

write a one-page essay explaining the significance and utility of competition in a free market economy.

Answer 1

SOLUTION

WHAT IS FREE MARKET, ITS SIGNIFICANCE AND UTILITY OF COMPETITION

The free market is an economic system ased on supply and demand with little or no government control. It is a summary description of all voluntary exchanges that takes place in a given economic environment. Free markets are characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions. Based on its political and legal rules, a countrys free market economy may range between very large or entirely black market.

• A free market is one where voluntary exchange and the laws of supply and demand provide the sole basis for the economic system, without government intervention.
• A key feature of free markets is the absence of forced transactions or conditions on transactions.
• While no pure free market economies actually exist, and all markets are in some ways constrained, economists who measure the degree of freedom in markets have found a generally positive relationship between free markets and measures of economic well being.  

UNDERSTANDING FREE MARKETS

The term free market is sometimes used as a synonym for laissez- faire capitalism. When most people discuss the free market, they mean an economy with unobstructed competition and only private transactions between buyers and sellers. However, a more inclusive definition should include any voluntary economic activity so long as it is not controlled by coercive central authorities.

Using this discription, laissez- faire capitalism and voluntary socialism are each examples of free market, even though the latter includes common ownership of the means of production. The critical feature is the absence of coercive impositions or restrictions regarding economic activity. Coercion may only take place in a free market prior mutual agreement in a voluntary contract, such as contractual remedies enforced by tort law.

THE FREE MARKETS CONNECTION WITH CAPITALISM AND INDIVIDUAL LIBERTY

No modern country operates with completely uninhibited free markets. That said, the most free markets tend to coincide with countries that value private property, capitalism and individual rights. This makes sense since political systems that shy away from regulations or subsidies for individual behaviour necessarily interfere less with voluntary economic transactions. Additionally, free markets are more likely to grow and thrive in a system where property rights are well protected and capitalists have an incentive to pursue profits.

COMMON CONSTRAINS IN FREE MARKETS

All constrains in free market use explicit or implicit threats of force. Common examples include: Prohibition of specific exchanges, taxation, regulations, mandates on specific terms with an exchange, licencing requirements, fixed exchange rates, competition from publicly provided services, price controls, and quotas on production, purchases of goods or employee hiring practices. When free market behaviour is regulated, the scope of free market is curtailed but usually not eliminated entirely, still take place with the framework of government regulations.