Question

1. Explain what is free market?

2. what are the advantages of free market?

3. enumerate the disadvantage

4. what are the different forms of interventions that may be imposed by the government on a market system?

5. What are the advantages and disadvantages of these?

Answer 1

1. Free market is a market form in ehich the prices of goods and services are determined by market forces of demand and supply without any government intervention.

2. Advantages of Free Market

• Large number of buyers and sellers: The number of buyers in an open market is so large that the share of each buyer is negligible and thus no individual buyer can influence the the market price.Similarly, the large number of sellers make it impossible for a single seller to influence market price. This helps in keeping a uniform price in the market.
• Homeogeneous/ Identical products: Since the products sold are identical, so the buyer has no specific preference to buy from a particular seller and are willing to pay only the same amount everywhere. Thus, no seller can charge a higher price for the same product.
• Freedom of entry and exit: Every seller has the freedom to enter or exit the industry which helps in avoiding abnormal losses or profits.

3. Disadvantages of Free Market

• Limited Product Range: Since the market is driven by buyers and sellers, the buyers may produce only a limited range of high profit goods. Products which are demanded by only a few consumers and do not give much profits are often not produced.
• Market Failures: Sometimes, when markets spin out of control, it leads to failure of markets such as the real estate market crash of 2008.
• Dangers of Profits: Due to the motive of profit maximisation, companies may ignore other aspects such as employee safety or protection of environment.

4. Different forms of interventions that may be imposed by the government on a market system are:

• To provide public goods like railways system, public defence etc
• To protect workers through labour laws.
• For environmental protection and other social responsibilities
• By implementing tariffs and subsidies.

5. Advantages of government intervention:

• It provides the people with general public goods and facilities.
• It reduces inequalities and poverty through tax system and by providing subsidies.
• It keeps a check on any unfair policies by the sellers.
• It provides protection to workers

Disadvantages of government intervention

• Government failure: It happens due to intervention from the government when it could have been avoided if the government would have not entered the market.
• Sometimes, governments are driven by a particular political or private group which does not meets aims of public welfare.
• The areas where government intervenes, it leads to lesser options or choices and may establish a monopoly.