Free Market Economies

Does no government intervention truly mean maximum efficiency?

A free market means there is no government involvement, and so it is up to privately-owned companies to choose what to make and at what price. This allows for multiple companies to produce the same product and compete, giving the consumer a wide variety to choose from, and this competition forces the manufacturers to improve to try and outcompete the other companies. This slowly improves the general quality of the product as well as the price, which makes a free market very useful for consumers. It also allows for many different products to be produced as there are restrictions and no budgets, so private companies have a free choice in what they produce. The price of a product in the free market changes following the laws of supply and demand using the price mechanism. The price mechanism works by adapting the price of a product depending on any changes to maintain market equilibrium.

For example, if a fall in demand meant that fewer goods are bought, then not all the supply will be sold which results in a surplus. The price mechanism would lower the price, increasing demand as people are more likely to buy the cheaper product and so removing the surplus and returning the market to equilibrium. Inversely, if demand increased as the product became more popular, but supply remained constant, then there is not enough to meet the needs of the consumers, and so the price mechanism would raise the price. This deters buyers who are not as invested in the good and so are not willing to pay a higher price, and so demand falls to meet supply and an equilibrium is again reached. This is one of the main advantages of a free market economy as it allows the price of a product to automatically change depending on how much is available and how much is needed, and so prevents a shortage or surplus from becoming a long-term problem and keeps the market stable. This is the economic system created and supported by Adam Smith, whose views and info you can view in the fact files section.

However, larger companies can force out smaller ones through predatory pricing, where they set their prices extremely low to the point where there is no profit. This means the smaller companies also have to do the same, but unlike the large businesses, they cannot survive the losses induced, which pushes them out of the market. This can lead to oligopolies, where a handful of large companies control the market, or even monopolies, where one massive business owns the entire market. This in turn leads to price gouging, where prices are raised unreasonably high to maximise profit, and consumers are forced to pay these large sums as all the cheaper alternatives have been forced out. A prominent case of an oligopoly and price gouging is in America, with ‘Big Pharma’, or the few powerful pharmaceutical companies which have driven prices of necessary medicine extremely high as they have no other competition. This has led to many losing their lives or suffering in pain because they are not able to afford the medicine they need. For example, insulin is vital for diabetes patients to allow their bodies to properly manage glucose levels, and it can be fatal if they are not able to do so, and yet the average price for 1 mL of Humulin (short-acting insulin) is $39.63 in America, but only $0.36 in India and free in the UK. This shows the scale of the situation –  a product that is free in some countries is sold for almost $40 per mL. [1]

[1] Statistics obtained from


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: