Revision:The advantages and disadvantages of a free market economy

- Competition between firms should lead to firms wanting to produce as efficiently as possible because they want prices to be as low as possible so that consumers will want to buy from them; this drive towards efficiency should mean that resources are not wasted.

- Goods, which are being demanded by consumers i.e. consumer wants will be produced, and those that are not in demand will be dropped.

- More choice for the consumer in terms of what they buy.

- Profit rewards those who are successful for the risks that they take; they can then reinvest profit to make more!

Disadvantages of a free market economy

- Since profit is the dominating/over-riding objective for firms, they may try to reduce their costs surreptitiously (in an underhand manner) e.g. by polluting the environment, exploiting workers (not protecting them in terms of working hours, health and safety - this is a human cost to society).

- Goods and services that are not profitable will not be produced/run. Rural communities will suffer as a result e.g. in terms of transport and post.

- Certain members of society will not be able to work and earn e.g. the elderly, the unemployed (because no firms want their skills), and the disadvantaged. They will be left and will fall into poverty (remember if there is no government, they cannot be helped).

- Certain goods and services are difficult to be sold to consumers e.g. nuclear weapons, which defend our country (and other defence weapons).

- Large firms can still dominate certain markets, even where there is competition, and exploit suppliers (by squeezing their prices down) and consumers (by charging higher selling prices) to maximise profits. TESCO’s dominance in the grocery market is a good example of this.

- Consumers may choose to buy goods that are not so good for them e.g. cigarettes and alcohol, illegal drugs (DEMERIT GOODS) at the expense of goods/services which they should be buying e.g. dental care, health care, fruit and vegetables, fitness memberships (MERIT GOODS). Society suffers as whole in these circumstances as workers become less productive.


- These are goods and services, which the government provides for society as a whole. They are financed out of taxation. Public goods include: education, health, roads, police, refuse clearance, street lighting. The most pure public goods CANNOT be rejected by society as a whole; they are there for everyone and cannot be stopped!

Credit goes to Stricof [1]