First 315 words of the document:
What is it?
A free market is a market where the price of a good or service is determined by supply and demand,
rather than by governmental regulation
Market forces - for: signalling, incentive and rationing functions of price can lead to an efficient
allocation of resources
The government may choose to intervene in the price mechanism largely on the grounds of wanting to
change the allocation of resources and achieve what they perceive to be an improvement in economic
and social welfare.
With government intervention, there is an opportunity cost.
The law of unintended consequences: Government intervention does not always work in the way in
which it was intended or the way in which economic theory predicts it should.
Therefore, government may intervene in order to reduce supply of a demerit good, increasing
Policies and analysis (analysis in red)
Could subsidise the production of a merit good such as work training programme in
order to increase consumption, therefore increasing social welfare.
However, if the government does not have enough information, then they may
overproduce the product, leading to excess supply and damaging the price mechanism.
Therefore, it could lead to government failure.
Could tax the production of a demerit good in order to decrease consumption, in order
to increase social welfare.
However, firms may just pass cost onto consumer as demerit goods are price elastic
due to little substitutes, not affecting demand.
Breaking up a monopoly in order to introduce fresh competition into a market, in
order to increase consumer choice and prices.
However, the monopoly's economies of scale could mean that the consumer gets
better prices when the monopoly is not broken up and the monopoly's ability to invest
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R&D means that in the long term, they could technologically innervate, passing on
those benefits to the consumer. Therefore, it may reduce consumer welfare instead.
Regulation- Price controls & minimum wage in order to ensure workers or consumers
are not exploited.
However, free market economists argue that this reduces competitiveness of
businesses in the long run, the added cost meaning businesses find it hard to compete
on a global level. E.g. firms in Britain competing with those in China.…read more