1.1.6 Free market, mixed and command economies

See question sheets on planned economies

Ok

How does a free market improve efficiency

A free market economy promotes both productive and allocative efficiency. It promotes productive efficiency because it allows inefficient firms to go out of business, and the factors of production used by these firms will be released back into the economy and transferred to efficient firms who are expanding. This is called creative destruction. Classical economists argue that creative destruction is needed to create high rates of economic growth. A free market economy also generates allocative efficiency . This describes a situation where the type of goods produced by firms exactly matches society's tastes and preferences, and this occurs in a free market via the invisible hand.

What is a mixed economy

A mixed economy is one where some resources are allocated by central planners employed by the government, whilst other resources are allocated by market forces. The economy is composed of a pubic sector, which is owned and run by the state. the goal of the public sector is to supply public services e.g. Education and health care. and a private sector, which is run by entrepreneurs. the goal of the private sector is profit maximisation. The relative size of the public/private sector is usually seen as a normative issue. Left-wing politicians and Keynesians tend to favour more government intervention. They believe that the free market has more weaknesses than strengths. To counteract so-called market failures big government is needed. Therefore, in countries that are run by left-wing politicians policies are pursued to expand the public sector at the expense of the private sector. Right-wing politicians and classical economists favour market forces. They believe that government intervention creates bigger problems that the original market failures that the intervention was designed to correct . In countries run by right-wing politicians, policies are adopted that are designed to expend the private sector by shrinking the public sector

What is a planned/command economy

A planned economy is one that consists of the public sector only. There is no private property, everything is owned by the state. The government owns all firms, land and property. Thus all of the economy's factors of production are owned and controlled by the state. Therefore, production in a planned economy does not take place for profit. In a planned economy, economists called central planners are employed try the state to answer the three question that comprise the basic economic problem. Decision making is therefore highly centralised which is teh exact opposite of the free market economy. The goal of the central planner is to try to resolve the basic economic problem in a way that will maximise society's total utility. in practice pure planned economies do not exist, nor have they ever existed. russia under communism is often used as an example of a planned economy. however, in practice the Russian economy was really a mixed economy, because even under communism citizens engaged in black market private sector activity, such as producing and selling drugs.

How can the free market economy not supply unprofitable, but socially essential services

A privately owned business will only operate if it is commercially profitable. Some services are not commercially profitable but they are still socially beneficial. For example, the EU subsidies farmers, even if the farmer chooses to leave their land fallow. The EU justifies using taxpayers' money to subsidise farmers because they believe that it makes the countryside more visually attractive to city dwellers to visit at the weekends

Give six advantages of a free market economy

A wide choice of high quality products, low prices for consumers, faster rates of innovation, efficiency, incentives to work, personal freedom and liberty

What is the Third Way

Advocates believe that the dynamism of the free market can be applied to the provision of public services rather than the government providing public services directly as a public sector activity. Third Way advocates argues that the government should make contracts with private firms to deliver public services. These private firms receive payment from the government- the money raised from taxation. Circuits of the third way point out that the general public will have to wait years to stop their taxes going to private firms who deliver poor quality and/or expensive public services

Give six disadvantages of the free market

An uneven distribution of income, no accesses to essential goods and services, the wrong output mix, high prices, the environment, the free market will not supply unprofitable, but socially essential services.

What did karl marx believe

Critic of laissez-faire capitalism. Believed that the governments should allocate resources, not adam smith's invisible hand of the market. Society is composed of the bourgeoisie capitalists (who own the means of production) and the proletariat (workers employed by capitalists) The labour theory of value- the value of a product is a reflection of the amount of labour required to produce it. labour creates all wealth. E.g. Coal underground only becomes valuable once labour has dug it up. The economic value of coal is a reflection of the labour time required to mine it. Capitalists generate profit by under-paying their workers. i.e the value created by labour is less than the wage paid. Capitalism is unstable and vulnerable to crisis- to boost profits capitalists try to replace labour with machinery. The unemployment created causes demand to fall creating a crisis of over-production . The criss ends when low wages and cheap capital restores profitability. But, overtime, capital becomes concentrated in fewer and fewer hands. which increases inequality. Revolutionary class consciousness- the proletariat come to a collective conclusion that they are being oppressed by bourgeoisie capitalists. And react by overthrowing the capitalists via revolution

How does a planned economy create macroeconomic stability

Due to business (trade) cycle, free market economies tend to grow at an uneven rate in the medium term. During so -called boom periods the rate of economic growth exceeds the long-term trend rate of economic growth. Booms are followed by slowdowns, which in turn lead to recessions. dring recessions the output of the economy decreases, leading to high levels of unemployment. the economic instability created by the business cycle creates uncertainty for businesses. This uncertainty damages business confidence, leading to lower rates of economic growth. instability can have a dramatic effect o people's lives. Planned economies did not suffer from this same instability because the government determines the output level of the economy

Give eight strengths of a planned economy

Low prices for consumers, full employment, macroeconomic stability , a more equitable distribution of income, a superior output mix, wasteful competition, a cleaner environment, product quality

How does a planned economy cause poor product quality

Factory managers were asked by the central planners to achieve their production targets at all costs. In a free market economy, where firms have to make a profit to survive, there is a much stronger incentive to produce high quality products. firms that sell poor quality products will struggle to attract the spending votes needed to survive in the long run. On the other hand, firms that produce high quality products will attract more spawning votes, leading to higher profits. In conclusion, in a free market economy strong incentives exist for firms to produce high quality products. These incentives do not exist in a planned economy, because in this type of economy producers do not need to make a profit to survive.

How does a free market economy cause faster rates of innovation

Firms innovate when they produce new types of goods and services. Innovation is important because consumer tastes change over time due to changes in fashion and technological advances. if society is to maximise its utility, the output mix of the economy will need to regularly change. In a free market economy those that respond fastest to changing consumer wants wil grab market shares from those who are less innovative and responsive.

How does a planned economy lead to inefficiency

For political reasons they often used expensive labour intensive methods of production that were unsuitable. State factories did not even attempt to measure costs. The only thing that mattered was achieving volume production targets. in a free market economy, a much stronger incentive exists to minimise costs. If costs can be reduced, firms will makes more profit.

How does a planned economy have The Economic Calculation Problem

Friedrich Hayek was an Austrian economist, who believed in the economic calculation problem. This states that central planners will never be able calculate what the economy should produce and in what quantities correctly, as they could never know our individual tastes and preferences as well as we do and so could never produce the right output mix that will satisfy the varied tastes and preferences of millions of sovereign consumers. Even if they carried out market research into fashions, by the time that it takes to collect the information about what people want fashion will have probably moved on. In planned economies some products were under-produced, which created shortages. On the other hand, some products were over-produced, creating wasteful gluts.

How does a planned economy provide a cleaner environment

In a planned economy the government could choose to operate wth a more expensive method of production that produces less pollution, as firms do not rely on profit to survive. In a planned economy type of goods produced might be more beneficial to society than the type of goods produced in a free market economy as in a free market economy firms produce anything that consumers wish to buy, some of which could be harmful. Also, the government can decide to produce goods that might be unprofitable to produce but are of great social benefit for society.

How does a planned economy give full employment

Full employment describes a situation where all those of working age who are fit and available for work are in work. It is relatively easy for the government to create jobs in a planned economy as firms do not have to make a profit to survive. High levels of employment adds to society's utility. People in work will receive a wage. therefore, there should not be any low income poverty in a planned economy because everyone receives a wage from the state. therefore in a planned economy there should not be problems such as homelessness. In addition, high levels of employment will also help society's emotional well-being. This is because most people derived most of their identity and self-respect rom their work. therefore, in planned economies the incidence of mental health problems should be lower.

What is government failure and why does it happen

Government intervention designed to correct market failure backfires and reduce's society's welfare. There are two reasons why government intervention can fail to produce desirable results: 1. Unintended consequences- government intervention is well-intended. However, the government's actions create undesirable and unexpected results e.g. Tax credits (people not paid enough so their wages get topped). The world is too complex for politicians to predict. 2. Public noice theory- economists assume that firms and consumers are motivated by self-interest. Public choice theory also assumes the politicians are motivated by self-interest. Big business lobbies politicians for tax breaks and subsidies. Bribes, political donations and the offers of lucrative jobs in retirement encourage politicians to make decisions for the benefit of big business, rather than the electorate

How does the free market economy decide how to produce

In a free market economy all production takes place for profit. Firms try to maximise their profits by choosing the most profitable method of production. This is usually the production method that minuses costs. The least cost method of production will depend upon factor prices and factor productivity. The four factors of production have corresponding factor prices: Labour - wages Land - rent Capital - interest Entrepreneur- profit If wage rates fall entrepreneurs will opt for a more labour intensive method of production. If wages rise, they will opt for a more capital intensive method of production. The second factor that affects the least cost method of production is factor productivity. Productivity is a term that describes the output achieved by a unit of a particular type of factor of production. The productivity of land is usually referred to as 'yield'. A rise in the productivity of a particular factor of production will tend to lead to more of that factor being employed.

How does the free market economy decide what to produce

In a free market economy consumers decide what shall be produced and in what quantities. Economists refer to this as consumer sovereignty. In The Wealth of Nations, which was published in 1776, Adam Smith described how consumer spending decisions create price signals. Price changes provide firms with valuable information about shifting consumer tastes and fashions and the type of goods that society should be producing. Consumers create price signals when they spend their incomes, and the price signals come as a result of self-interest as consumers are using their limited money income to buy the combination of goods and services that will maximise their pleasure. Profit maximising firms respond to the price signals created by consumers by producing more of the goods that consumers want because they also act out of self-interest because it is more profitable to supply products that consumers want to buy. In a free market economy the output mix of the economy is determined by millions of decisions made separately everyday by millions of households and firms who are each pursuing self-interest. Adam Smith used the phrase 'The Invisible Hand of the Market' to describe this decentralised decision making process. (These firms will sell more of their products, leading to higher revenues and profits. Similarly, price signals also tell firms which products they should produce less of because they have fallen out of favour with consumers. Firms that ignore these prices signals and fail to produce goods that we wish to buy will struggle to generate the revenue needed to cover their costs. These firms will makes losses and go out of business. Smith argues die that society must allow unprofitable firms to fail. The land, labour and capital used by these inefficient firms must be released. These same resources can then be used more productively by firms that makes products that consumers want to buy. Governments should never try to save loss-making businesses from closure. There are two reasons why: the government should not be int the business of rewarding failure, as it damages the long-term good of the economy. the resources used by these inefficient firms could be freed up to be used for use by more efficient firms to produce goods and services people actually want to buy. Using society's scarce factors of production to produce unsatisfactory products doesn't make sense. also, bailing out loss-making companies using taxpayers' money penalises successful firms who are capable of meeting the wants of sovereign consumers. Bailouts are expensive. They lead to higher taxes. When taxes rise, households are left with les of their own income to spend. The fall in disposable income created by higher taxes will leaves households with fewer spending votes to cast. This will reduce the revenues and profits of successful firms who would have received the spending votes confiscated by the state. ) Adam Smith believed in the principle of laissez-faire. According to Smith, the economy works best when the government remains small. Politicians do not need to tell firms what to produce, because, thanks to the invisible hand, the free market is self-regulating as firms will choose to produce the products that consumers want. Instead consumers and firms should be left alone by the government to pursue their own self-interest. Like Smith, the Austrian economist, FA Hayek, also believed that the output mix of the economy should be allowed to energy organically. Hayek likened this process to an economic election. Everyday millions of consumers make individual spending decisions according to their own unique tastes and preferences. Every time money is spent, spending votes are cast,. When consumers want more of a particular product they will cast more of their spending votes on it. This increase in demand created will cause the price of the product in question to rise. In turn, the price increase will increase the profitability of supplying this product, compared to other products. Firms will respond out of self interest by producing more of the product that has gone up i price. On the other hand, if a product becomes less popular, consumers will cast fewer spending votes. On the product that they now want less of. The decrease in demand created by sovereign consumers will cause the price of the unpopular product to fall. Firms will respond to this price signal by producing less of the product that has fallen out of favour with consumers. This is because a fall in price will reduce the profitability of supply, ceteris paribus.

How does the free market economy create the wrong output mix

In a free market economy firms will produce whatever consumers want. they will produce whatever is profitable. Critics of the free market believe that consumers sometimes do not know what is best for them. This could be because they are irrational or poor consumer decision making might be attributed to a lack of information. Supporters of big government believe that society would be better off if we stopped producing and consuming alcohol, cigarettes and services such as gambling. The resources used to produce these demerit goods could be transferred into other industries.

How does the free market economy decide who gets to consume

In a free market economy the limited goods and services produced are allocated according to an individual's ability to pay, on their income. Individuals with higher incomes will be able to consume more goods and services that poorer individuals. An individual's income is determined by factors such as intelligence, emotional intelligence (e.g. Willingness to work hazard, skills and education, family background and inherited wealth) and luck. Because some individuals have more spending votes than others, some consumers have greater power over the allocation of society's scarce resources than others. In most societies a high percentage of society's scarce resources re used to produce goods and services that the rich desire. This explains why some societies fail to adequately provide essential services such as health and education . In these society it's health and education are only produced and supplied for those that ave the ability to pay.

Define a free market economy

In a free market economy there is no governemtn intervention, apart from the provision of law and order and national defence. All other decisions are made by individuals and firms. Households decide what job they want to do and their working hours. Households also decide what goods they want to consume with the wages that they have earned. Like households, firms are also motivated by self-interest; they aim to macimise profit. The best way of achieving this goal is by producing the type of goods that consumers want to buy. Thus, in a free market economy, society's output mix is determined by consumers.

How does the free market give incentives to work

In a free market economy there is no welfare state. If you do not have an income to live off, you will not be able to consume. This creates a very powerful incentive for people to work. The economy benefits from a powerful incentive to work. Labour is a factor of production and if it increases in productivity then the economy could experience long-run economic growth.

How does a planned economy provide product quality

In a free market economy, firms might be tempted to cut costs by buying in cheaper raw materials or by using production methods that might compromise product quality

How does the free market economy not grant access to essential goods and services

In a free market society health care will only be provided to those who have the ability to pay the prices charged by private providers. It could be argued that in a civilised society essential services such as health care should be provided according to clinical need, not ability to pay

How does a planned economy create weak incentive

In a planned economy most people earned a fairly similar salary regardless of what they did and how hard they worked. As a result, it was difficult to persuade people to work hard. Weak incentives cause inefficiency. Factors of production were used inefficiently, which limited production, and hence, consumption possibilities

How does the planned economy decide what to produce and in what quantities

In a planned economy the central planner decides what goods and services shall be produced; the government is sovereign. The central planners are employed by the government to try to second-guess the tastes, wants and needs of the population. The government produces what they think is needed by society, rather than what is most profitable. Planned economies are closely linked to the political theory of Communism. According to Karl Marx, who co-wrote the Communist manifesto, governments should strive to produce a basic standard of living for all. as a result, central planners would prioritise the production of essential goods and services, such as food , education and housing that are needed by all. There are no reich elites in a communist society. So there is little need to produce luxury goods that are designed to confer status.

How does the planned economy decide how to produce

In a planned economy the central planners decide on the production methods to be used. Factory managers are set volume production targets. Factor managers did not monitor production costs. Instead, managerial performance was measured according to whether production targets were achieved or not. In most planned economies the central planners would opt for a labour intensive method of production in order to maximise employment. For political reasons Russian central planners frequently adopted the wrong methods of production. The government set wage rates for all occupations. This ensured that mean were paid the same as women for the same work. Pay differential did exist between occupation , for example doctors were paid slightly more than nurses. However, they were not as extreme as in capitalist economies. The distribution of income (The distribution of income measures the degree of spread around the mean average per capita income) in a command economy is generally more even than it is in a free market economy

How does a planned economy create a superior output mix

In a planned economy the government decides what shall be produced. The central planners could improve society's total utility by refusing to produce demerit goods. A demerit good is a product that is worse for a consumer than they believe. In a free market economy demerit goods are consumed because the buyer of the demerit good overestimates the private benefit of consuming the demerit good relative to the private costs. By refusing to produce the demerit good the planned economy will have more factors of production available to produce merit goods. E.g. In the planned economies of Eastern Europe, the quality of media and entertainment was generally high. The government produced newspapers and magazines that were designed to culturally enrich the country. in a free market economy TV stations have to make a profit to survive. As a result, they might choose to concentrate on mass market programmes sch as reality TV and endless quiz shows. in a planned economy the government has the opportunity to suse scarce resources to instruct the national state owned Tv station to concentrate on producing documentaries and operas instead.

How does a planned economy create a more equitable distribution of income

In a planned economy the government sets everybody's wage rate. Therefore, occupational wage differentials between jobs were far smaller than that of a free market economy. This means that the distribution of income in a planned economy was fairly even. As a result, most pople living in a planned economy enjoyed a broadly similar material standard of living.

How does a planned economy lead to pollution

In practice, the central planners prioritised achieving production quotas over environmental protection. The planned economies of eastern Europe suffered greatly from environmental damage caused by inefficient state businesses that were happy to pollute the environment provided that they hit their production targets. The governments of these countries did not pass any environmental laws because this would have created a situation where the government would have been forced into prosecuting itself.

How does the fre market grant personal freedom and liberty

In the free market all economic activity takes place on a voluntary basis. In order for a transaction between a buyer and seller to take place it must be mutually beneficial. Austrian economists, such as Friedrich Hayek, argue that value is subjective in a free market economy. Trade occurs because we buyers and sellers value things differently. However, transactions that take place between the state and its citizens are not based on free will. For example, the government might decide to take some of your wages in tax to finance a war that you do not want. You cannot stop your money from being spent on something that you do not want. if you refuse to pay taxes to the government the state will imprison you.

Give the disadvantages of a mixed economy

Instability- in a democracy the sectoral balance of a mixed economy is constantly changing. Left-wing politicians favour nationalisation. Right-wing politicians favour privatisation. Policy swings create uncertainty for private firms. Excessive intervention by the government- classical economists believe that in some mixed economies the public sector grows too large and crowds out the more efficient private sector not enough intervention- socialists argue that even in a mixed economy with a welfare state the gap between rich and poor will be too great.

See questio sheet on fre market economy

Ok

What are the key features of a free economy

Private ownership- all businesses are privately owned. the government does not supply health care, education, care for the elderly or any other good or service apart from the provision of law and order and national defence individual freedom and liberty,- people can choose what job they want to do, firms can sell and consumers can buy whatever they like, provided that the product in question does not physically damage somebody else of their property. People can say whatever they like. The state only has the right to intervene in private affairs if one private party is physically damaging another or their property. specialisation- free markets are based on voluntary and mutually beneficial exchange that takes places between individuals, firms and even whole countries, who have all chosen to specialise mutually beneficial, private exchange- households and firms are motivated by self-interest. Therefore, voluntary transactions between buyers and sellers will only take place if they are mutually beneficial. Free market economists believe that value is subjective. these differences in subjective value allow trade to happen.the more mutually beneficial transactions that take place in a free market economy, the higher the level of well-being within society. Transactions between the state and private individuals are based on coercion, not free will therefore, transactions between the state and its citizens do not have to be mutually beneficial. society is driven by self-interest- firms are motivated by a desire to maximise their profits. consumers also pursue self-interest by using their limited money incomes to buy the combination of goods and services that will maximise their pleasure. Adam Smith believed that society is well-serviced by the pursuit of self-interest, because the best way to maximise profit is to produce something that consumers want to buy. prices as signals- price changes provide firms with valuable information about shifting consumer tastes and fashions and the type of goods that society should be producing. Consumers create price signals when they spend their incomes. See "how does the free market economy decide what to produce" laissez-faire- economists who favour the free market believe that good government is small government. The only role for government in a free market economy is to provide law and order to preserve property rights and national defence. This is needed. as if property rights are not upheld there will be a strong incentive for people to steal what they need, rather than working for it. Advocates of Laissez-faire believe that government spending must be kept to a minimum, because it pushes taxes up. High taxes cause two problems: - the first is that tax reduces our incentive to work - second, taxation leads to a misallocation of society's scarce resources, because the government, or centralised decision making, will never know our tastes and preferences as well as we do ourselves. The Austrian economist, Ludwig von Mises referred to this as the Socialist Calculation Problem. Politicians who claim to know acht we want better than we do ourselves suffer from what Friedrich von Hayek called a Fatal Conceit. . instead, governments stand aside and allow the output mix of the economy to be determined by the spontaneous order created by the invisible hand of the market. Spontaneous order is what happens when government leave people alone; when entrepreneurs see the desires of consumers and then provide for them

How does a planned economy lead to limited choice

The central planners believed in centralised production. For example, before the fall of the berlin wall all of the steel produced in eastern europe came from one gigantic factory located in Krakow. This centralisation of production resulted in less choice for consumers. For example, in Czechoslovakia if you wanted to buy a car you could only have a Skoda

What are the different views of Adam Smith, Friedrich Hayek and Karl Marx

Smith argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests; the great threat to economic growth is government intervention. Hayek was critical of command economies; he was concerned about the information required to distribute resources effectively and argues its as impossible for the government to process this information effectively. marx considered the flaws of free market economies; he argues that the free market economy would break down because the owners of business made huge profits at the expense of workers.

How could a free market economy create high prices

Some markets are only supplied by a single firm. Businesses that enjoy monopolies do not have any competitors. this means that they are able to exploit consumers by charging high prices. Critics argue that there will always be some industries that are natural monopolies, as these industries usually have high start up costs and so there is only enough room in the market to support one firm. Supporters of free markets argue that most monopolies are caused by government regulations that prevent new firms from entering a market that is currently being supplied a single firm. Markets are not to blame for monopolies, the government is.

Give the advantages of a mixed economy

Supporters of the mixed economy believe that this type of hybrid economic system can deliver the dynamism of the free market economy. However, unlike a free market economy, the mixed economy is regulated by the state. Supporters of the mixed economy argue that government regulation is needed to correct market failures that would otherwise occur in a pure free markte economy. Examples of market failure include: imperfect competition, externalities (spoil over effects e.g. Pollution), information failure (where government knows what's good for citizens better than they do), and public goods (commercially unprofitable but socially essential services e.g. Street lamps) Governments intervene by raising revenue through taxes and redistributing income in the form of benefits and direct provision of services such as healthcare.

Give 6 examples of government intervention in a mixed economy

Taxing firms who create pollution Subsidising companies who produce merit goods that would be otherwise under-consumed in a free market Regulating the availability of harmful demerit goods e.g. Licensing laws for alcohol and gambling Blocking takeovers between firms who compete in the same market- the government's goal being to prevent monopolies Taxing the rich heavily to finance welfare benefits for the poor- the goal being to make the distribution of income more even supplying so-called public goods, such as street-lighting that won't be provided by the private sector

How does the command economy decide for whom to produce

The ability to consume in a command economy is determined by need, rather than ability to pay, with the essential available for everyone. However, when prices of goods and services were set by central planners mistakes were common. Health care and education were provided free of charge. Other goods that were deemed to be essential by the central planners were sold for prices that wer way below the cost of producing these items. By setting prices very low the central planners hoped that these goods and services could be consumed by everyone in society, eve the very lowest paid. Popular products that consumers liked quickly sold out at the low prices charged by the state, creating shortages. in practice products were allocated by queues and waiting lists, rather than by incomes and ability to pay. The combination of low prices for essentials and an even distribution of income created a society where most people had a fairly similar material standard of living.

How does a free market economy give low prices for consumers

The desire to maximise profit in a free market ensures that consumers receive the lowest prices possible. This is because there is competition in a free market and if a firm charges higher prices for the same product then that firm will lose sales to other firms who sell the same product for a lower price.

How does the free market economy create an uneven distribution of income

The distribution of income measures the degree of spread around the mean average per capita income. Critics of capitalism assert that free market economy causes a divided society where there are huge differences in incomes, and thus living standards, between rich and poor. In a free market economy there will always be huge differences in incomes. This is because physical health, intelligence, and diligence are unevenly distributed, all of which affect a person's ability to earn an income. Inherited wealth can also cause income inequality. those born in to families who own income generating assets (land, companies, bonds, property shares etc) may enjoy a very high standard of living despite never having worked a day in their life. This is unfair.

Give six disadvantages of a planned economy

The economic calculation problem, poor product quality, inefficiency, limited choice, pollution, weak incentive

How does a planned economy give low prices for consumers

The government sets prices so that essential goods, such as food, accommodation and heating, are affordable to all in society. In a free market economy prices will only be low if there is competition between producers operating in the same market. If one firm has a monopoly they can exploit its market power as a sole supplier and charge high prices. This type of consumer exploitation should not happen in a planned economy. Prices are set to ensure affordability, rather than to maximise profit.

How does a planned economy stop wasteful competition

To operate effectively a free market economy relies on active competition between firms operating in the same industry. It could be argues die that this competition is wasteful as they have to spend lots of money on advertising. Businesses operating in a planned economy do not compete against each other. as a result, they do not waste money on pointless advertising campaigns. The money saved on advertising can be used to produce more goods. Secondly, goods should cost less to buy because the prices charged no longer have to carry the cost of advertising.

How does a free market economy give a wide choice of high quality products

We all have our own tastes and preferences, therefore we all want slightly different things. This means that firms will need to produce a wide range of products to satisfy consumer wants. Firms will also produce high quality products as consumers are unlikely to want to spend their money on products that do not maximise their utility. Therefore firms will produce a wide-range of high quality products as it is the best way to attract the extra customers needed to increase profit

How can a free market economy damage the environment

When firms produce goods and services using fossil fuels, pollution is sometimes created. pollution reduces the non-material standard of living within society. Private firms are only interests in their profits. Pollution does not affect a producer's profits. Therefore, pollution is often ignored by firms. In free market firms can sometimes put their profits before their social responsibilities towards the environment, and leave society as a whole worse off