What are the disadvantages of a market economy?

[Jennifer N]

I need help fast please. I have a social project due tommorow.

[chris n]

good and services are not allocated equitably. i.e., good and services do not go to the people who want nor need them most.

[corneliustheman]

Market failure, which falls into four categories.

First of all, there is "market power," whereby monopolies and industries dominated by few firms are allowed to prop up - this is bad for consumers, since it means less output and higher prices.

Secondly, there are negative externalities; for instance, firms which emit carbon dioxide while making products do not think about the economic consequences of their pollution.

Third, there is incomplete information; buyers and sellers may not have perfect information and goods and services, leading to inefficiencies in the market.

Finally, we have the issue of public goods - goods that are nonrival and nonexclusive (like roads, bridges, etc.). Private firms have little incentive to provide these products on the market, and so government must provide public goods.

Hope this helps.

(P.S. Regarding the comment below, the person does not appear to know what neoclassical economics is: it is a methodology, not an ideology. Indeed, John Roemer is a Marxist/socialist economist who uses a neoclassical framework in his work!)

[Kalibasa]

The free market is brutal- always has been and always will be. But neoclassical economists will still always defend it as the only workable way to distribute goods and services.

*Distribution* is what economics is all about- how to allocate limited resources to unlimited wants. According to capitalism, goods and services are distributed through markets, through the law of supply and demand. Suppliers want to create goods that are expensive, so that they can make a large profit; consumers obviously want to buy goods that are cheap. If suppliers sell for too high a price, people won't buy, and if they sell for too low a price, they won't make a profit. The ideal price, then, falls in between (where the graphs intersect)- expensive enough that suppliers will still create the product but cheap enough that people will buy.

This is how the free market guarantees the proper use of resources. One of the fundamental laws of economics is "the value of a good is what it would be worth in alternative uses." Cheese, yogurt and milk are all made from milk, so how do you decide how to distribute the milk? The market tells you- if people really need/want milk, the price rises and suppliers give more of it (and less to the other products). This is how capitalism distributes resources. (Compare to communism, where there were constant shortages of one good while people were swamped in another).

The thing that's crucially missing from this is equality. The point of economics, again, is that resources are *limited*- there isn't enough for everyone. Market prices regulate the supply of goods perfectly, but the price is often too high for the poor to afford; they're the ones who get cut out. This is capitalism's greatest flaw. The free market is brutal to suppliers as well- firms that underperform get knocked out of the market. This is why many, then, are opposed to the "bailouts" all over the news - according to most economists, these firms are complacent and uncreative and deserve to be replaced by more efficient models. Yes, people will lose their jobs, the market will be shaken- but this is just the price of free markets, and the benefits are worth the costs.

Monopolies are another danger of free markets. Look at Standard Oil in the early 20th century- they controlled virtually every part fo the industry, which eventually defeats the whole idea of a "free" market. The market isn't free when one company can set whatever prices it wants, knowing that there is no competition and consumers have no other choice. There's also the idea of externalities- a firm can pollute the environment, for example, knowing that it won't have to pay for the costs. This cost falls on society in the form of increased health care, environmental damage and property devaluation. Monopolies and externalities are both cases where what is good for one firm is detrimental to everyone, and some regulation may be required. Our markets, then, asren't truly "free," and they probably shouldn't be.