Competitive markets, free from government intervention are the best means of allocating society’s scarce resources amongst its members. While economists theorise about markets free from government intervention, regulated markets, though generally less efficient, are also functionally viable. It is through the analysis of both types of markets, and their relative applications within society, that economists can critically evaluate their effect upon the allocation of society’s resources amongst its members.
A competitive market is an economic forum run by supply and demand, where “price is a result of voluntary transactions1”. A market free from government intervention is known as a free market, and under ‘perfect conditions’ is theorised to be the most efficient. However, it is only through the introduction of regulation, that these markets can be seen as more equitable to members of society. While perfectly competitive markets, in the long run, achieve economic efficiency, in reality, government intervention provides a legal framework to enforce contracts, monopolies, and political, economic, and environmental conflicts.
Perfect competition provides a framework to achieve the desired outcome of workable competition, through effective regulation. A market economy free from government intervention is theoretically preferred in many ways, however there are some aspects of its functionality that render it inappropriate within a practical society. While unregulated competitive markets are “a more efficient allocation of societal resources that any design could achieve2”, they have the tendency to inequitably distribute resources.
Competition within the free markets ensures that some parties are excluded. They are unable to participate with the en-mass buying and selling of goods that determines price within the market, according to the laws of supply and demand. Within free markets, unlike regulated markets, external force is not a determinant of price, nor is it used to prevent competition. Free competition between vendors facilitates price decreases and encourages the increase of the quality of a product or service.
This is beneficial to members of society as a higher quality good at a lower price encourages competition. Furthermore it contributes to civil and political economical freedom by ensuring that the customer’s are heard as their discussions determine what product or service is in demand. In a free, self-perpetuating market, if there is a need for a good there is always a supplier to provide that good, given the availability of resources. A free market has a much lower cost of business attached to it, as there are no regulations imposed by the government.
Government intervention of free markets through the introduction of tariffs, quotas and taxes, aims to increase the equity amongst trading parties. Introduction of regulations are necessary to protect consumers, as large corporations are generally not looking out for the public’s interest. Furthermore, through regulating rates within monopoly environments, government intervention stabilises the economy. Through this stabilisation of price, regulation gives the domestic producer a chance to compete with foreign goods.
Regulation implemented by bureaucracy, however, can squash innovation and stifle growth. If a government heavily regulates the private sector, it too can become inefficient. This also applies to domestic firms, whereby their decrease in efficiency leads to decrease in the quality of good or service produced. Under a centralised wage system, the government determines wage rises, award rates and benefits. While this initially leads to a fairer distribution of income across the economy, the award rate being set above the market rate can lead to lower productivity and unemployment.
While, in some circumstances, this government intervention and regulation may be seen to decrease efficiency, it increases the equity among trading parties, which is essential to the functionality of market within a welfare state. The main problem associated with the converse approach, a decentralised wage system, is that while it is more economically beneficial through efficient allocation of resources, it leads to increased income inequity as skilled workers derive the main benefit. This is a self perpetuating cycle, increasing the perceived inequity among trading parties.
The effects of this inequity are seen most relevantly within health and education in the public sector, therefore affecting the allocation of society’s scarce resources to it members. The need for regulation can be seen by closely scrutinising the over-consumption of water resources along the Murray Darling. Had the government not intervened a competitive market would not have formed, and lead to over use of the resources in the short-term, and environmental degradation over a longer period of time.
Also, without the government’s intervention, parties closer to the river’s source would have a preferential position in collecting the resource, and a monopoly would form. If this were to occur, society’s scarce resources would not be effectively allocated amongst its members, as lower production costs and increased consumer demand would lead to over consumption. Too much government intervention however, will leads to poorer allocation of resources across the economy. This is evidenced within the rental market in New York, where price ceilings were implemented to control the market.
If the government introduces a policy that leasers cannot charge above P1, then it causes inefficiency within the market, and wasteful allocation of apartments. This is because at a lower price, demand will now move to qII (A greater demand at a lower P), and the supply will move to qI (Less apartments leased at a lower P). This creates an excess quantity demanded (qI –> qII). Had the market not been interfered with, the percentage of the market still willing to pay p0 would have been able to lease an apartment.
It is this implementation of regulation that causes adverse affects within society, stifling the allocation of scarce resource, including housing, to members of society. Another example of the introduction of regulation by the government is evident in the senate’s recent introduction of the alcopop tax. The government tried to address the issue of binge drinking by introducing an alcopop tax that increased the excise on ready to drink alcohol by nearly 70%. This reduced the consumption of alcopops by 29% due to the elasticity of their demand.
It seems that while the demand for alcopops is elastic, the demand for alcohol, in general, is not. Thus, people have simply substituted their consumption of alcopops for harder spirits or cheaper cask wines and binge drinking has not decreased. The implementation of the tax causes the supply curve to shift to the left to s1. This causes the price to rise to p1, and the quantity demanded to decrease to q1. This should have curbed teen binge drinking, however substitution of other alcohols was not properly taken in to consideration.
This is due to the elasticity of demand for alcopop’s, and the relative inelasticity for other types of alcohol. It is in the striking of a balance between free and regulated markets that a trade off between efficiency and equity can be made. A certain amount of inequality may be provided, in order to provide incentive for innovation and economic growth. While free market economics aren’t perfect, neither are completely regulated economies, it is in the compromise between free markets and the amount of government regulation needed to protect people and the environment, that society’s resources are effectively allocated to its members.Mixed markets provide this balance, and protect public interest, while allowing private business to flourish.
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