A free market is a market system in which the prices for goods and services are set freely by consent between sellers and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

Benefits of free markets:

1. Economic efficiency: profits aim to maximise profits (by increasing level of output and decreasing level of input). Competition ensures that firms use the least cost and most economic methods of production – such as efficient use of labour and technology.
E.G. Fuel-efficient airlines – reducing plane weight e.g. smaller water tanks
2. Allocative efficiency: firms use scarce inputs to produce a combination of goods that maximises the welfare of the population. Resources go to firms that are most efficient at satisfying customers
E.G. If the population as a whole valued organic fruit and vegetables more highly than alternatives they would demonstrate this through the markets and firms would shift resources into production of organic produce
3. Consumer sovereignty: consumer drives productions. Firms that are sensitive to consumer demand will profit and grow.
4. Economic growth – resources will be directed away from firms that are inefficient and unprofitable to firms that are profitable and efficient
This generates economic growth – which leads to higher employment – leads to more consumption – leads to economic growth

Criticism of free markets

1. Free market benefit of Allocative efficient uses the perfect market assumption: that there are many buyers and sellers, no government intervention, homogenous products, freedom for entry and exit, perfect knowledge = not a realistic assumption.
Variations of these characteristics result in a less than perfect market and sub-optimal efficiency of resources use.
2. Consumer Sovereignty: Consumers are supposed to make rational decisions based on perfect knowledge – which they don’t have. Persuasive advertising influences consumers
3. Equity – consumers with more money have more power within the market place. Consumers with a low disposable income cannot access the goods and services that they need.
4. Public, merit and demerit goods
5. Externalities: firms do not have to take into account the externalities by their actions

Public Goods: Would not be provided in a free market, as suppliers cannot charge users.
Non-rival: one person using the good does not prevent another person from using the good
Non-excludable: once provided, cannot charge users for using it
e.g. street lighting, signage, clean beaches
Merit goods: seen as having a social benefits and probably would be underprovided in a free market.
- These goods tend to have short-term costs but have social and private benefits in the long run.
- People with a low disposable income – would be tempted not to purchase these which has a negative externality on the community in the long run.

Demerit goods: seen as having negative externalities and would probably be overprovided in a free market.
These goods have short-term private benefits but long-term social and private costs.
In a free market the organisation that produces these goods are not forced to rectify the externalities.

An example of market failure: Ticket scalpers

In a free unconstrained market, prices are set by the point where demand are supply are in equilibrium.
- The promoter would profit from selling tickets at this price.
PROBLEMS:
- don’t know what the market is willing to pay
- Tickets for special events are often “under-priced” for social equity / political reasons.

Method and benefits of market intervention

- Central planning: production decisions are made by govt planning teams
- Mergers and Monopolies: Aim to protect consumers from high prices and reduced choice created by concentration of ownership (e.g. ACCC – in Australia)
- Laws, permits and control planning: used by all levels of govt to constrain a free market:
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