16.2 The Case for Free Markets Flashcards
Why are free markets impressive institutions?
Free markets are impressive institutions. Consumers’ preferences and producers’ costs lead to demand and supply decisions that generate price signals. These signals coordinate separate decisions taken by millions of independent agents, all pursuing their own self-interest. In doing so, they allocate the nation’s resources without conscious central direction.
How do markets determine the distribution of income?
Markets also determine the distribution of income by establishing prices of factors of production, which provide incomes for their owners.
How have modern market economies improved peoples living standards?
Furthermore, modern market economies, where firms compete to get ahead of each other by producing better goods more cheaply, generate the technological changes that have raised average living standards fairly steadily over the past two centuries.
What is the first “formal” defense of free markets?
The essence of the formal defense of free markets is that if all markets were perfectly competitive, and if governments allowed all prices to be determined by demand and supply, then the price would equal marginal cost for all products and the economy would be allocatively efficient. Allocative efficiency means that resources are used in such a way that total surplus to society—consumer surplus plus producer surplus—is maximized.
The second “informal” defense of free markets is based on three central arguments:
- Free markets provide automatic coordination of the actions of decentralized decision makers.
- The pursuit of profits in free markets provides a stimulus to innovation and growth of material living standards.
- Free markets permit a decentralization of economic power.
What does a market system allow for in its participants?
A market system allows for coordination without anyone needing to understand how the whole system works.
