Key Advantages of Free Market Economic Systems

Key Advantages of Free Market Economic Systems Include

By Brian 8 months ago

A free market economic system is anchored on the tenets of Laissez-faire. This implies little or no government intervention through any central regulatory agency. Key advantages of free market economic systems include but are not limited to:

1. Room for innovation

A free market economic system is driven by fair competition among players. Companies that invest in innovating existing products and services are often rewarded in this type of economic structure. In this case, the reward is increased market share, higher customer satisfaction, and loyalty.

Almost every player in this economic system wants to take the reward home. They must use their resources to win larger customer share through enhancing existing products or services. In the quest to outperform and potentially acquire some market share from competitors, players are highly incentivized by the need for innovation.

Monaco is an example of a city-state whose citizens and residents enjoy the fruits of a free market economy.

In a state with free market economic systems like Monaco, companies compete with each other based on their merit in innovation. The state does not control too much of its industries and allows the city’s demand and supply of goods and services to determine prevailing prices.

A constantly evolving legislative framework supports this innovative environment for startups and established businesses. With little regulation on how to utilize resources for innovation purposes, business significantly flourishes in innovation.

2. Consumers drive the success of products

In a free market economy, consumer options are not controlled centrally. This blocks any greedy party that would compromise the forces of demand and supply to exploit consumers. Consumers are in full control of what to consume from different producers.

Consumers in a free market economic structure support producers who meet and surpass their expectations. Thus, there are genuinely successful products or services in such a market, unlike in a command economic system.

To put this into perspective, let’s take a look at the following example:

Consumers would support telecom companies with the most reasonable rates and reliable networks in a free market economic system. Services of a Telecom company in a free market economy will thus be genuine as per the consumers’ choices.

Alignment of product success and customer satisfaction would not be the case in a command economy.

Genuineness is not guaranteed in a command economy. Some few powerful individuals in the government might decide to promote the success of certain Telecom Companies that have self-interests in them. These Telecom companies may not be the best, but consumers would be forced to buy their services whether they are reliable or not.

3. Consumers’ interests are at the heart of producers

Consumers buy from the best or most reasonable producers in a free economy market structure. For a company to resonate with consumers, it must consider their interests. Such a company must produce goods and services from a consumer’s point of view. Even though businesses are intended to make profits, they emphasize satisfying consumers to make these profits.

Consumers enjoy the quality of products and services available in the market, and by itself, this is among the key advantages of free market economic systems. The government does not have to intervene to ensure the quality and standards of goods and services consumers buy. Instead, consumers’ change of brand choice automatically forces players in an industry to up their game in business.

4. Optimization of utilization of resource inputs

Since individuals control input resources, they decide how and where to utilize them. Producers in a free market economic structure use resources and inputs optimally to meet their innovation agenda.

In a free market economy, no central agency controls the supply of input resources. Since all producers have fair access to production resources, the one that best utilizes their input resources to innovate leads the rest.

For example, companies with the same labor force supply might not record an equivalent level of innovation for different reasons. One company could be investing its capital in a diversification of portfolio. Another company could be investing its finances in research and development. These two companies would, of course, not compete shoulder to shoulder in terms of their innovative solutions to consumers’ problems.

5. Private ownership of factors of production

For startups to flourish in an economy, it is substantially dependent on their access to factors of production. In an economic system where the state owns and controls production factors (command economy), it is systematically hard for startups to flourish.

On the contrary, in an economic system where individuals can own and control factors of production, the private sector flourishes alongside the public sector.

Private ownership of factors of production is among the key advantages of free market economic systems because it supports the best use case of these resource inputs.

For example, in economies where individuals can own land, they often put this land to better use than in economies where land belongs and is controlled by the state. Here is a simple logic: if you own land as an individual, you know if it’s best for crop farming, establishing a livestock rearing facility, or any other suitable use. However, if such land was owned and its use controlled by the state, there is a high likelihood of misappropriation of its utilization.

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