Based on the theory of Invisible hand by Adam Smith, He expected that an economy can function admirably in a free market situation where everybody will work for his/her own particular interest. He proposed that if individuals were permitted to trade openly, there would be a gain in competition in the market, driving markets towards the positive yield with the assistance of an invisible hand.
In Free Market in the event that somebody charges less, the client will purchase from him. Hence, in order to attract more customers seller need to bring down their cost or offer an option that is superior to its rival. When there is greater demand of a product, it would be opening the market to new sellers which would eventually drive the prices low. If there are less sellers and demand is higher the prices will be higher aswel. The merchant winds up getting the cost and the purchaser will show signs of improvement merchandise at the coveted cost.
In general, an example could be of a person making a purchase to buy a coffee and a doughnut. This purchase would benefit the individual buying a coffee and a doughnut as well as the seller. This eventually would have an impact on the whole society if there are numerous other sellers selling coffee. Some provide doughnuts, some provide bagels etc. All in all when there is competition among sellers the buyers get a better price and eventually sellers get profits too if they serve better quality attracting more sales.
Arguments for government intervention
· Greater opportunity and equality – redistribute salary and wealth to enhance fairness and balance of outcome.
· In a free market, Markets may neglect to consider externalities and are probably going to under-create open/justify merchandise. For instance, governments can sponsor or furnish merchandise with positive externalities.
· In a free market, there is a high chance that some firms may gain the opportunity to become the market leader resulting in a monopoly market, this empowers them to set higher costs for shoppers. Government involvement to set some regulations of monopoly can prompt lower costs and more noteworthy financial productivity.
Government involvement to stop merger of some of the biggest industry giants have saved from creating a monopoly market its sector. (Most recent example is AT&T and T-Mobile in 2011 merger was blocked as it would “substantially lessen competition”)
Arguments against government intervention
· Governments making wrong choices due to political pressure – impacted by political weight gatherings, they spend on wasteful projects which prompt a wasteful result.
· If government gets much involved it would impact the Personal freedom. Government intervention is taking endlessly people choice on the best way to spend and act.
· Politicians may not have the same market discipline of looking to amplify the utilization of limited resources.
· Government can grant subsidies to firms, yet this may guard inefficient firms from rivalry and make hindrances to entry for new firms since prices are kept ‘artificially’ low. Grants, and other assistance, may lead to an issue of ethical risk