Question

Do you agree with the statement that ‘regulation of businesses in free market economies is central to its smooth functioning’? Justify your answer.

Answer 1

I agree with the statement.

In a free market, as we know the law of supply and demand regulates the production and labor. A consumer is charged the highest price he is willing to pay and the employees receive the highest paycheck a company could provide. So, how long does this free market continue to be at the state it is?

Answer is as long as we can experience the regulation. A truly capitalist economy is considered to be a free market wherein the sellers are allowed to set the prices. But, when the sellers tend to be greedy and set the prices high taking advantage of free market, there is a welfare loss for the consumers. Similarly when wages are set below par, the employees face a dearth in purchasing power.

This is the moment were government steps in regulates the market by imposing price caps and minimum wages with other laws protecting consumer welfare. These regulations ensure the smooth functioning of the free market and establishes a market equilibrium so that no entity in the economy takes an undue advantage of the free market. Therefore the statement is justified.

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