Is a free market the ideal system for distributing scarce resources?

Answer 1

The "invisible hand" of free markets is the best system possible for distributing scarce resources since the battle between supply and demand is arbitrated by the pricing mechanism between producers and consumers. The argument against allowing the free market to operate to distribute scarce resources is that it allows windfall profits for producers and may wind up pricing some consumers completely out of the market.

Despite the potential unfairness of a free market allocation of goods, real world experience has provided many examples of the pitfalls of curbing free markets through government imposed price controls or rationing. Under the most extreme circumstances if the pricing of scarce goods is set at a level below the cost of production and distribution, goods will soon disappear completely from the marketplace since producers would soon go out of business if forced to sell their goods at a price far below the cost of production. Under this scenario, even those able to pay for expensive goods would not be able to acquire them since they would simply not be available. A more likely scenario that usually develops under price controls and rationing is the emergence of a black market in which goods can be easily acquired but at a much higher price point than that set by price controls. Black markets can also be viewed as unfair since only those with sufficient resources would be able to purchase scarce items.

Another advantage of free markets is that while prices may soar temporarily for certain scarce goods in high demand, the high profits of companies producing such goods will be a powerful inducement for other companies to begin producing those goods and over time supply will increase and prices will revert to normal levels. Free markets may not be the perfect solution in the short term but have proven to be the best long term generator of national wealth, job creation, and goods production.