Advantages and disadvantages of the market system

Advantages of market system

1. Market system automatically responds and adjusts to the people’s wants

As we know, in a market system, the price of goods and services are determined by the forces of demand and supply. If consumers want a particular good or a service, they simply demand for it and the prices go up, which gives signal for the producers to produce more of that good. If producers can produce the required amount of that particular good, the price automatically comes down to normal. Likewise, if people no longer wants a particular good, they simply stop demanding for it, so that it is no longer profitable for producers to produce that good, so producers stop producing that good.

2. Wider variety of goods and services

In a market system, producers compete with each other by offering wider variety of goods, therefore consumers have more choice, this may even lead to lower prices.

3. Competition pushes businesses to be efficient: keeping costs down and production high.

The aim of firms in a market economy is to make as much profits as possible. In order to do this, the firms need to be more efficient. Therefore they often use new and better methods for production, this leads to lower costs and higher output.

4. Government does not have to take decisions on basic economic questions

The market system relies on producers and consumers to decide on what, how and for whom to produce. Therefore it does not require the government to employ a group of people to take these decisions

The disadvantages of market system

1. Factors of Production is not employed if it is not profitable

In a market system, producers do not produce a good or a service if it is not profitable. But sometimes it may be necessary to produce some goods even if it is not profitable. Therefore Market system will fail in this aspect.

2. Market system may not produce certain goods and services

Private firms in a market system will not be willing to provide certain public goods like street lights because it is almost impossible to charge any payment from the consumers.

3. Free market may encourage harmful goods

If there are people in the market who wish to buy dangerous goods like narcotic drugs, the market will be ready to buy it since private firms will be willing to provide anything that is profitable

4. Production may lead to negative externalities

When firms are always trying to maximize their profits, they may ignore external costs like damages to the environment.

5. Free market economy may increase the gap between the rich and the poor

When firms and individuals are able to produce and consume freely, it may make the rich even richer because they have more decision making power, and the poor may become poorer because they have less decision making power in the market. The market system allocates more goods and services to those consumers who have more money than others.

Previous Topic: Types of economic systems