How does a free market influence the economy, and what kind of imbalances can a free market create?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Free markets have a tremendous impact on an economy.  First, free markets answer the fundamental economic questions in their economy.  That is, they determine what goods and services get made, how those products are made, and for whom they are made.  In that way, they shape the economies in which they exist.  Second, free markets tend to bring about greater prosperity.  Up to this point in world history, the richest countries are those that have free markets.  As far as we know at this point, no other type of economy can bring about as much wealth.  Finally, free markets tend to increase levels of personal freedom.  In a market economy, people are free to make whatever economic choices they want without the government telling them what to do.

Although free markets do bring about prosperity and freedom, they also cause imbalances that can be negative for the societies in which they exist.  One imbalance is the imbalance between individual desires and societal needs.  Free markets are good at fulfilling individual desires, but they can cause societal needs to be neglected.  For example, free markets can often lead to high levels of pollution and other environmental degradation as people seek their own interests without worrying about what is good for society.  A second imbalance is the imbalance in wealth among people in a free market.  Free markets do not do a good job of ensuring that everyone can have a decent standard of living.  Instead, free markets tend to create income and wealth inequalities.

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