Free Market vs Government Intervention

Question 1

Pros of free market

Answer 1

• Allocative efficiency (solves basic economic problem) through price functions (signalling, rationing, incentivising) (no excess supply and demand) (low price, high quantity/choice)
• Profit motivation (can reinvest in R+D)
• Freedom, liberty, choice
• No government failure, costs of policies etc.

Question 2

Cons of free market

Answer 2

• Market failure (under/over consumption or production)
• Profit motivating can be bad (e.g. blood) (firms may exploit consumers) (ethics) (cost-cutting leads to unemployment etc.)
• Governments are able to deal with these problems

Question 3

Pros of government intervention

Answer 3

• No market failure
• Stops firms from abusing consumers (reduces prices for consumers etc.)
• Can deal with any market failures

Question 4

Cons of government intervention

Answer 4

• Won’t have allocative efficiency (higher prices, less quantity/choice etc.)
• Not profit motivated (less spending on R+D)
• Less freedom, liberty, choice for consumers
• Can lead to government failure (making problems worse), policies can be costly

Question 5

Evaluation for market failure

Answer 5

Is there a market failure?
Would leaving to the free market be better?
Weigh up the risk of government failure
Over-intervention could hurt, removes freedom (nanny-state, libertarian paternalism)