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Overview

Pros

Increased efficiency

The profit motive encourages producers to be more efficient. Competition between firms keeps prices down and acts as an incentive to firms to become more efficient.The more efficiently firms can combine their factors of production, the more profit they will make.

Consumer wishes

The more firms there are competing, the more responsive they will be to consumer wishes.

Innovation

Innovation is promoted because it provides a competitive edge.

Functions automatically

There is no need for costly and complex bureaucracies to coordinate economic decisions.


Cons

Merit goods will be under-produced and demerit goods will be over-produced.

Public goods cannot be provided by the free market because of their two characteristics, non-diminish ability and non-excludability.

Lack of competition and high profits may remove the incentive for firms to be efficient.

Power and property may be unequally distributed.

The practices of some firms may be socially undesirable. For example, a chemical works may pollute the environment.

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The Free Market Pros and Cons

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