Does A Free market always Benefit Society?

Discuss whether economic actions by individuals always result in a net benefit to society.

Adam Smith’s seminal book on economics – ‘The Wealth of Nations’ suggested that if we leave economic decisions to a free market (avoid intervention) then the ‘invisible hand of the free market will, generally, lead to the best outcome and highest net benefit to society.

However, even Adam Smith, noted some exceptions.

Monopoly Power. If firms can generate monopoly (or monopsony power) then they become in a position to set higher prices for consumers and lower wages for workers. This can lead to inequality and a misallocation of resources.

Other Problems of Free markets and leaving decisions to individual agents

Exterternalities. Decisions which impose a cost on a third part. – negative externalities

Inequality. Free markets tend to lead to inequality of wealth and income. These can exacerbate social divisions

Wrong Kind of Goods. Free markets will overproduce demerit goods and under produce public and merit goods.

• Market Failure