Free Market And Competition

Published Date: 02 Nov 2017

Free Market is thus a laissez-faire economic policy which consists of deregulation, free trade and capital flow where firms are given the autonomy to run on their own without the state intervention.

The UK, US, India ( to an extent ), Australia, all twenty seven countries of the European Union (Spain, Germany, France, Italy, etc) as well as numerous other nations are the examples of Free Market Economic Nations.

The growth of free markets economies in the 20th century, how did it happen/occur?

Stagnant state-centered growth effort in the Third World countries, globalization, the clear collapse in the Keynesian economic policy in advance capitalist western countries, the collapse of the Communist bloc countries, Social revolution in China and the rise of political leaders such as Edward Seaga of Jamaica in the Third World, Ronald Reagan in United States, Lee Kuan Yew of Singapore in Asia and the late Margaret Thatcher in the Europe ended the state-dominated economic systems and introduced the ideology of free market as the way forward for economic growth.

What are the positive aspects of a Free Market economic system?

The success stories of the free market economies points us in various directions. From the Western Europe, United States, Scandinavian countries, Singapore to the fast growing economies like India and China, it showed that the nations prosper when people are permitted to make economic choices that they choose in their best of interests.

A booming world economy boosts the financial security by having sovereignty and advancing prosperity which will than been spread out to the world. Free Market allows people to lift their lives out of poverty, fight against corruption, stimulate legal and economic transformation and it reinforces the individual freedom and private ownership.

Free-market and competition

Competition under Free-Market is simply the right to life, property and liberty applied to the sphere of production and trade. This means that one is free to take any action, unbridled by others, as long as it does not breach the rights of others. This is the significance of competition. Competition is vital because it is a system to liberate from inefficient producers and requires producers to improve their products and lower prices to attract consumers. When there is competition, they make products cheaper, so they can lower their prices further.

Under Free-Market, competition is an economic process where men to raise their self up and not to compete to put down others but raising their competitors up in the process and charting value which are unlimited. The key concern of the Free-market competitor and producer is the creative works and as a close second, its profitability and commercial application.

The productive and creative conglomerates in a free market economy create competitive prices and permitting buyers from all social strata to afford the new and improved. The key to the success of a Free-market competition is the limitation of competition to the economic sphere of production.

It has been proven that without competition a firm can control a society by selling a product everyone needs and inflate prices to make more turnovers. Competition will thus decrease inferior products at inflated prices because you can just buy from the firm that gives you the best deal.

Indirectly, the competition in Free-Market society will lead to competencies. That is the most significant value of creating skills. Important areas of knowledge are unique to a free-market economy and critical to the country's long term growth and innovation.

Free Market involves an important degree of coordination and cooperation among suppliers, producers and customers. It has been said that, Free-Market competition is positively vigorous and it’s a competition of abilities and competency.

Free-Market leads to Inequality – [refer to Appendix Graph 1]

Since the drive in the Free-Market economy is focused on profits and Cost, there could be a creation of monopoly in areas that are deemed unimportant.

Substantial economic fortunes are being accumulated into the hands of a few tycoons sitting atop huge empires, and the new free market firms have rapidly gravitated to monopoly status. In brief, monopoly power is ascendant as never before.

The monopoly power that free-market firms have can direct to lower levels of output and higher prices and a loss in welfare. A monopolist increase price and slashes output. Producer surplus increases, consumer surplus decreases, and community surplus decreases (welfare loss). Firms seek to achieve monopolies, sole control of services and goods, where prices are set by the firm rather than market demands.

In a free market economy, it creates a huge gap in between the rich and the poor. In order to make money, firstly you have to take it from other people. This can be done through buying and selling goods, taxation or any other means. Rich become richer due to the law inheritance and economic autonomy to own property economic development. The poor go on becoming poorer. There’s only so much space at the top.

Vast imbalances in opportunity encourage uprising, because some individuals focus all the wealth in their control. Wealth is accumulated in certain hands. People tend to get caught up in hypo theoretical bubbles but ignore economic essentials, leading to absurd behavior.

Unethical, fraudulent and exploitation of laborers are often noticed in such an economy. Wages are intentionally set very low as laborers will endure. Steps to guarantee consumer protections such as quality and safety are in use when they can draw a customer base.

The conflict between the workers and free market enthusiast goes on. Therefore, free market society not only fails to provide fairness of opportunity, but also fails to create equality of outcome.

Monopoly leads to inequality and can contribute to economic stagnation, everything else being unequal. This can be justified by how The United States and most of the European Union economy trapped in an economic stagnation and crisis since the 2008.

Free-Market Economy affects the employment rate – [refer to Appendix Graph 2]

Looking at employment statistics in Britain today after the Great Recession of 2008, unemployment in Britain stands at roughly two million. This is not too far from the three million mark of the Margaret Thatcher era. With the private sector fallout and public sector job losses, expected to claim another million people, it is unsurprising that people fear a return to those dark days.

State Industries that are deemed vital but not necessasary viable may be closed down or reconstructed. The late Margaret Thatcher closed down mining industry, fishery industry, coal industry and focused on financial industry. This lead to drastic increase in employment rate.

In many Free-Market economies, Long-term Foreign and Domestic trends contributed to unemployment. This comes with a cost such as cost cutting drives, technology and innovation replacing workers, foreign trade and outsourcing, constantly finding cheaper labors leads to unemployment. Whether long-term unemployment is lasting or temporary, the current unemployment data and figures remains far from being resolved. It is an organic feature of the Free-market system in action.

The continual drive for efficiency in production and profit is the spirit of the Free-Market Economic setup, regardless of the cost to thousands of entirely capable workers. The only solution is an essential change in the way the society is structured.

Government Intervention.

Certain Free-Market Economy models have revealed that when the interests concerned are public goods and services, there is a necessity for a certain level of state intervention. The state intervention is to construct a thriving and booming economy and yet protecting the needs of its citizens.

The states through the financial units have diversified tools at their disposal to restrain any disastrous effects that a superficial market failure may bring. The two most efficient form of state intervention in a Free-market economy are the obligation of ceiling prices, predominantly in when it comes to public goods and services which the state has an interest to regulate floor prices, where the state will ensure it is profitable that there is an incentive for people to supply it, and last but not the least, taxes and subsidies.

Price Ceiling & Price Floor – Price Control – [refer to Appendix Graph 3 & 4]

Price Ceilings and Price Floor in the free market economy are examples of how government intervenes, which alters the market equilibrium. Price Floors are minimum prices set by the State for certain services and goods that they believe are being sold at a very low price, thus the producers deserve support. While Price Ceilings are maximum prices set by the state for particular services and goods that they believe are being sold at a very high price, thus the consumers require help in acquiring them. In nearly all cases, price floor is above the market price and price ceilings are below market price. There will be no clear effect if a price ceiling is set above market price and this shows that the ceiling price is only a preventive measure.

A price floor is a synthetically introduced minimum for the price of a services and good. If the government puts in price ceiling, the quantity supplied will be lower than quantity demanded, meaning that fewer goods and services will be supplied to satisfy demand. The state will only intervene when there is a low supply due to economic hindrance of profit margin or low price by placing a price floor to create a surplus which will above the average price.

Subsidies and Taxes – [refer to Appendix Graph 5]

A subsidy is a payment paid by the government to a producer which aims to increase output and reduce their costs and should encourage more consumption. The effect of a subsidy is drive prices down and to increase supply, if all things remains ceteris paribus. The effect is to shift the supply curve to the right. This should raise demand to the level it should be at if the benefits of consumption were taken into account, this can be seen as a correction of market failure as under consumption of merit goods can lead to a loss of social welfare. Subsidy causes a raise in market supply, thus leads to a lower equilibrium price. In this market, there will be under consumption of good with a positive externalities.

The main reason why Government intervened to give subsidies is to enable better communal competence. Consumers end up paying the socially efficient price including the external benefit. Subsidies are to help domestic firms become more competitive in the international market, also known as protectionism.

Another way in which the state can intervened in the market is through taxes. The tax acts as a controller in the sense that by imposing a tax on a public good , suppliers are going to raise the price of the good proportionally in to pass the burden on to the consumer . This causes the demand to adjust and suppliers will find a surplus and prices will also adjust accordingly.

Indirect taxes is also been used by the state to increase the price of de-merit goods and products and with negative externalities deliberated to reduce consumer demand towards a collectively optimal level and raise the opportunity cost of consumption.

Besides, the state would offer financial aid such as tax credits for business investment many distinctive fields. Reduction in corporation tax can also been used to encourage extra employment and cultivate innovative capital investment inflow.