Free market cost

The US economy is essentially a free market economy—an economic market run by supply and demand—with some government regulation. In a truly free market, buyers and sellers conduct business without any government supervision, but politicians and economists have been arguing about how much government supervision the U.S. economy needs.

Those who want to reduce regulation believe that if government restrictions are lifted, the free market will force companies to protect consumers, provide quality products or services, and create affordable prices for everyone. They believe that the inefficiency of the government will only create a huge bureaucracy and increase the cost of doing business for everyone.

Those who believe that government regulations are necessary to protect consumers, the environment, and the public, claim that the company does not take into account the interests of the public, and it is for this reason that regulations are needed.

In this article, we will consider the pros and cons of a completely free market and a government-regulated market.

Key points

  • For a long time, economists and policy makers have been arguing about how economic and trade policies should be open or restrictive.
  • The free market is theoretically optimal, and supply and demand are guided by an invisible hand to efficiently distribute goods.
  • However, in reality, free markets are vulnerable to manipulation, misinformation, power and knowledge asymmetries, and contribute to wealth inequality.
  • Regulation aims to balance the advantages of the free market with its pitfalls.

Free market economy

In its purest form, a free market economy means that the allocation of resources is determined by supply and demand without any government intervention.

Supporters of a free market economy claim that the system has the following advantages:

  • In theory, it contributes to political and civil liberties, because everyone has the right to choose what to produce or consume.
  • It contributes to economic growth and transparency.
  • It ensures a competitive market.
  • The voice of consumers is because their decision determines which products or services are needed.
  • Supply and demand create competition, which helps to ensure that consumers are provided with the best goods or services at lower prices.

Critics of the free market economy claim that the system has the following shortcomings:

  • The competitive environment creates an atmosphere of survival of the fittest. This has led many companies to ignore the safety of the public in order to increase the bottom line.
  • Wealth is not evenly distributed-only a small part of the society has wealth, and most people live in poverty.
  • There is no economic stability, because greed and overproduction lead to severe economic fluctuations, from strong growth to catastrophic recession.
  • The assumptions required for a free market to function well are inconsistent with reality, such as the myth of perfect and symmetric information, rational participants, and cost-free transactions.

The impact of deregulation

Sometimes deregulation has had mixed results, which has led to criticism of the operation of the free market. For example, until the 1980s, AT&T was a regulated state monopoly. During this period, the telecommunications industry was synonymous with the American Telephone and Telegraph (AT&T). AT&T controls almost all aspects of the telephone business. The company’s regional subsidiary (“Babyling” for short) has the exclusive right to operate.

In the 1970s, after a period of rapid development of telecommunications, independent companies that wanted to compete with AT&T began to appear. These companies claim that AT&T’s telephone monopoly actually keeps them out.

AT&T’s deregulation occurred in two different stages, beginning in the early 1980s. Part of this process is the 1996 Telecommunications Act. Extensive research has been conducted on the impact of this law (and deregulation in general), which has led to expected (and unanticipated) consequences.

AT&T’s deregulation aims to provide consumers with more competitive long-distance calling rates. In fact, many small companies have begun to provide local phone services, countless Internet service providers have emerged to connect homes to the Internet, many phone companies have merged, baby bells have tried to thwart competition, regional companies have been slow to expand into long-distance services, and some consumption due to deregulation Consumers-especially residential consumers and people in rural areas-face higher rather than lower prices.

Similarly, the purpose of deregulation of American Airlines in 1979 was to provide consumers with more choices and lower ticket prices. In fact, many questions have been raised about whether deregulation has worked. When the Airline Deregulation Act was passed in 1978, there were 43 airlines. But by 2013, there were only 9 airlines. Due to the passage of this deregulation bill, many large airlines were actually forced to close down, either filed for bankruptcy or were acquired by competitors.

Although one of the stated goals of airline deregulation is to “avoid unreasonable concentration, which often results in one or more airlines unreasonably raising prices, reducing services, or eliminating competition,” the reality is that the aviation industry continues to integrate , Even farther. In fact, the four major US airlines control 80% of seats.

Although airlines were able to reduce flight prices for a period of time, thousands of employees were unemployed, employee pensions were cancelled due to bankruptcy, poor service quality and increased customer complaints.

In 1978, all tickets were refundable, allowing customers to change their tickets without penalty, canceled flights will be compensated, seats have more legroom, meals are free, and luggage is free. By 2007, the situation had changed: airlines now charge up to $200 for checked baggage changes, cancel most food, reduce legroom, and increase ticket prices.

The deregulation of the cable industry in 1996 produced similar results. Since deregulation, cable TV rates have soared; according to a 2003 report by the US Public Interest Research Group (PIRG), between 1996 and 2003, cable TV rates increased by more than 50%. Obviously, in this deregulation situation, increased competition has not lowered consumer prices.

Another example of the failure of the free market can be seen in environmental issues. For example, the oil industry has been opposed to laws requiring double hull tankers to prevent leakage for many years, even after the single hull tanker Exxon Valdez leaked 11 million gallons of oil into Prince William Sound in 1989.

Similarly, the Cuyahoga River in northeastern Ohio was so polluted by industrial waste that it caught fire several times between 1936 and 1969 before the government ordered a $1.5 billion cleanup. Therefore, critics of the free market system believe that although some aspects of the market may be self-regulating, other aspects, such as environmental issues, require government intervention.

Regulated economy

Regulations are rules or laws designed to control the behavior of their applicable objects. Those who do not follow these rules face fines and imprisonment, and may have their property or businesses confiscated. The United States is a mixed economy, and the free market and government both play important roles.

A regulated economy has the following advantages:

  • It is concerned about the safety of consumers.
  • It protects the safety and health of the public and the environment.
  • It is concerned about the stability of the economy.

The following are the disadvantages of supervision:

  • It created a huge government bureaucracy and stifled growth.
  • It can create a huge monopoly and cause consumers to pay more.
  • It suppresses innovation through excessive regulation.

Some historical examples of the effectiveness of regulations include the ban on DDT and PCB, which destroy wildlife and threaten human health; the enactment of the Clean Air and Water Act, which mandates the cleaning of American rivers and the establishment of air quality standards; and Federal Aviation The creation of the FAA, which is responsible for controlling air traffic and enforcing safety regulations.

A few historical examples of regulatory failures include:

  • In response to the Sarbanes-Oxley Act (SOX) of 2002, a bill formulated in response to accounting scandals, many companies considered listing in the United States too troublesome and decided to conduct an initial public offering (IPO) in London. The Stock Exchange (LSE), they don’t have to worry about Sarbanes-Oxley.
  • There are many regulations in the coal industry, and shipping coal overseas is more profitable than selling it domestically.
  • Many labor and environmental regulations force companies to move jobs overseas, where they can find more reasonable regulations

Find balance

There is a delicate balance between an unregulated free market and a regulated economy. Here are some examples where the United States seems to strike a good balance between the two:

Due to deregulation, several ways in which the economy loses its balance include:

  • The deregulation of the savings and loan (S&L) industry in 1982 led to fraud and abuse, causing the federal government to spend billions of dollars to stabilize the industry after many S&Ls went bankrupt.
  • Workers without proper training caused a nuclear reactor on Three Mile Island to nearly melt, releasing radiation into the air and water. Pennsylvania Secretary of State Gordon McLeod was fired for expressing his concerns about the lack of oversight of the nuclear industry and the state’s lack of preparation for such emergencies.
  • The lack of adequate supervision of silicone breast implants led manufacturers to know that the implants would leak but still continue to be sold, resulting in a $4.75 billion settlement with the 60,000 affected women in 1994.

Bottom line

The free market economy is not perfect, but it is not a fully regulated economy either. The key is to strike a balance between the free market and the amount of government regulation needed to protect the people and the environment. When this balance is reached, public interests will be protected and private enterprises will flourish.

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