The Cost of Free Markets

In a free market, buyers and sellers conduct business without government regulation. There is debate among politicians and economists about how much government regulation is necessary for the U.S. economy.

More vs. Less Regulation

Proponents of less regulation argue that when government restrictions are removed, the free market will force businesses to protect consumers, provide superior products or services, and create affordable prices. They contend that government is inefficient and creates bureaucracy that increases the cost of doing business.

Those who argue that government regulations are necessary to protect consumers, the environment, and the general public claim that corporations do not have the public's interest in mind.

In 2023, the Federal Trade Commission and 17 state attorneys sued Amazon.com, Inc., claiming the company uses anticompetitive and unfair strategies to maintain a monopoly. The suit says that Amazon prohibits rivals from lowering prices, degrades product quality, and stifles innovation.  

Free Market Economy

In its purest form, in a free market economy, the allocation of resources is determined by supply and demand without government intervention. The term “free market” is sometimes used as a synonym for laissez-faire capitalism.

Advantages of a Free Market Economy

• It contributes to political and civil freedom since everybody freely chooses what to produce or consume.
• It contributes to economic growth and transparency.
• It ensures competitive markets.
• Consumers determine what products or services are in demand.
• Supply and demand create competition and ensure that the best goods or services are provided to consumers at a fair price.

Disadvantages of a Free Market Economy

• A competitive environment creates an atmosphere of survival of the fittest, leading businesses to disregard the safety of the public to increase the bottom line.
• Wealth is not distributed equally.
• Greed and overproduction cause the economy to have wild swings ranging from times of robust growth to cataclysmic recessions.

The Regulated Economy

The United States is a mixed economy where the free market and government play different roles. A regulated economy protects consumers and the environment and ensures market stability. However, regulation can create bureaucracy that stifles economic growth, encourages monopolies, and diminishes innovation.

Some historical examples that show regulation at work include the ban on DDT and PCBs, which destroyed wildlife and threatened human health; the establishment of the Clean Air and Water Acts, which forced the cleanup of America's rivers and set air quality standards; and the creation of the Federal Aviation Administration (FAA), which controls air traffic and enforces safety regulations.

Regulatory attempts that failed include the Sarbanes-Oxley Act of 2002 (SOX), which forced companies to move initial public offerings (IPOs) to the London Stock Exchange (LSE) instead of the United States to avoid accounting regulations. Regulations affecting the coal industry prohibit domestic profitability and force companies to ship coal overseas.

Historical Examples of Deregulation

When government power is reduced or eliminated in a sector, it is called deregulation. Deregulation is usually initiated to create more competition within the industry and stave off monopolistic practices. Historically, deregulation has produced mixed results.

Telecommunications

Until the 1980s, AT&T functioned as a regulated national monopoly. American Telephone & Telegraph (AT&T) controlled nearly all aspects of the telephone business. Regional subsidiaries (called "Baby Bells") held exclusive operation rights. The deregulation of AT&T was intended to provide consumers with more competitive long-distance telephone rates.

In actuality, numerous smaller companies began offering local telephone service, countless internet service providers linked households, many telephone companies merged, the Baby Bells attempted to thwart competition, regional firms were slow to expand into long-distance service, and some consumers, especially residential consumers and people in rural areas faced higher, not lower, prices as a result of deregulation.

Airlines

The deregulation of U.S. airlines in 1979 aimed to provide consumers with more choices and lower airfares. When the Airline Deregulation Act passed in 1978, there were 43 airline companies. In 2023, there were 19. Airline deregulation aimed to avoid concentration, where one or more air carriers could unreasonably increase prices, reduce services, or exclude competition.

In 1978, all airline tickets were refundable, customers could revise flights without penalties, seats had more legroom, and meals and checked bags were free. By 2007, airlines charged for checked bags, added fees for ticket changes, eliminated most food, reduced legroom, and raised airfares.

The Bottom Line

A strong economy usually strikes a balance between free markets and the amount of government regulation needed to protect people and the environment. When this balance is reached, the public is protected, and private business flourishes.

Correction—April 2, 2024: A previous version of this article incorrectly defined the U.S. economy as a free market economy.