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Arguments in Favor of Free Market System of Resource Allocation

Autor:   •  May 2, 2012  •  Research Paper  •  2,542 Words (11 Pages)  •  1,127 Views

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1a) Arguments in favor of free market system of resource allocation.

“A major source of objection to a free economy is precisely that group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.” (Milton Friedman)

A free market system is essentially an economy in which the buyers and sellers of goods and services are solely responsible for their exchanges. Each transaction is a voluntary agreement between two parties based on a mutual agreement on price without state/government intervention in the form of taxes, subsidies or regulations. In simpler terms, a free market system is an economic system where the government does not interfere in business activity in any way.

In free market systems, economies are based on supply and demand, they are the sole determinants of resource allocation. This is mainly a speculative notion as every country, even capitalist ones, still acquit some restrictions on the ownership and exchange of commodities. This type of system is reckoned to be one of the most effective ways to use a country’s resources, thus, there are many countries switching over to this methodology.

Present-day, there are a reasonable number of countries that acts in accordance to the free market system, some examples of these include the USA, Mexico, Japan, Brazil and Canada.

The concept behind a free market is that prices will regulate themselves, supply and demand will reach the point of equilibrium where the most money will be made. The main objective or goal that all businesses have in common, is to make a profit, hence businesses could function more effectively in a free market as there are no restrictions on the profits they can make.

However within the free market system, profits and losses are controlled based on the demands of the consumers for the good or service being provided. Demand is the total quantity of products or services estimated to be purchased at a particular price, whereas, supply is the total quantity of available products for purchase at any specified price. Equilibrium is the meeting point for demand and supply, when they balance, prices are stabilized. (figure 1.1 represents this data)

Resource allocation is the evaluation of the scarcity of the factors of production or the ‘resources’ are divided amongst producers and shared amongst consumers. During this evaluation, the accounting cost, economic cost, opportunity cost and other costs of resources and services are taken into consideration, it is normally correlated with economic efficiency and the maximization of utilities.

There are two main types of resources, renewable and non-renewable. Renewable resources are the resources which can be replenished naturally at a continual rate, (e.g. water, oxygen, timber). Non-renewable resources on the other hand are limited in supply and cannot

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