16.2 The Case for Free Markets LO 2
The case for free markets can be made in two different ways. The
“formal defence” is based on the concept of allocative efficiency, as
seen in Chapter 12.
The “informal defence” of free markets is not specifically based on the
idea of allocative efficiency and thus applies to market structures
other than just perfect competition. The informal defence of free
markets is based on three central arguments:
1. Free markets provide automatic coordination of the actions of
decentralized decision makers.
2. The pursuit of profits, which is central to free markets,
provides a stimulus to innovation and economic growth.
3. Free markets permit a decentralization of economic power.