Free Market vs Regulated Market: Similarities and Differences
Free market vs regulated market are markets that could exist within a society. No society can exist without having a market as markets are the commercial centers of society and the various economic activities that occur within it. Whether the market is free or regulated, it is a necessary component that brings producers and consumers together, starting the process of contractual and mutual exchanges between two or more parties. The similarities and differences that exist between a free market and the regulated market shall be discussed after we have looked at what each market type means.
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Understanding the free market and regulated market
The free market is a market in which the factors of production such as labor and capital are controlled by private individuals. This means that the various means of production such as land, labor, and capital are privately owned.
A regulated market is a market whose factors of production are controlled; either by the government or some other organized body. This means the government is an integral part of all activities that occur in the market. Let us have a closer look at each one of these markets below.
What is a free market?
Key characteristics of a free market include limited government interference, low barriers to entry, competition, and economic freedom. This is different from a command economy which is prevalent in communist societies; in these societies, the government usually determines how resources will be utilized, what products or services should be offered, and also sets the price at which these products and services will be bought or sold. In a free market, producers can manufacture any kind of products they want and sell it at whatever price they decide since the market is largely profit-driven. This market is generally self-regulated; with buyers and sellers setting the pace of how contracts and transactions are carried out.
For instance, individuals living in a country that has a free market may decide the kind of work they want to do, how they want to spend their money, and in what quantities they want to purchase goods or services. Some advantages associated with a free market economy include the promotion and stimulation of entrepreneurship and innovation as well as the fostering of the economic growth of the society. Hence, free markets are often associated with societies that have a high per capita wealth. Ideally, a free market exists without any form of restriction on the goods or services offered; instead, the consumers determine which products or services will continue to exist in the market through their purchases.
In reality, however, free markets also have some level of government intervention albeit a limited one. Governments in a free market often serve a regulatory function; imposing tariffs on exports and imports, executing legal restrictions on businesses that could be harmful to society, and enforcing standards in various sectors to keep up with minimum production requirements. In the United States, for instance, the U. S. Securities and Exchange Commission (SEC) is a regulatory organization saddled with the responsibility of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.
Therefore, economies that practice capitalism is often associated with free market economies even though there are some inherent differences that exist between a free economy and a capitalist economy.
What is a regulated market?
By this, it means that there is a restriction on the level of entry; the authorities determine who can start a business in the market. This is often done through the establishment of certain rules and regulations guiding the market such that anyone wanting to enter the market must meet those laid down rules and regulations. The government could also determine the price that will be charged for the products and services that are available in a regulated market. Some other controls on the market could include taxation, environmental protection laws, labor laws, anti-discrimination laws, etc.
Generally, regulated markets exist in sectors such as gas, electricity, water, and telecommunications where monopolies are likely to develop if left unchecked. The development of monopolies could lead to misuse of power and often result in poor service delivery at high prices. Regulated markets also exist in sectors that are important to the normal functioning of society and national security; any imbalance in such sectors could have dire consequences for society. These sectors include critical industries such as banking and finance, health, and weapons manufacturing. Regulated markets are often established when the government partially privatizes some of its utility assets such as electricity, water, or some other industry.
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Free market vs regulated market: Similarities and differences
Now that we have better understood the free market and regulated market, let us have a look at some similarities and differences that exist between these two markets.
Similarities between the free market and regulated market
- Both are markets where buyers and sellers come together for transactions.
- Commercial activities and contracts are executed in both markets.
- Free and regulated markets exist in societies.
- Both markets comprise producers and consumers.
Free market vs regulated market differences
- In a free market, the role of government is limited to ensuring that individuals keep to their contractual agreements when carrying out transactions. In a regulated market, the government’s role is not restricted. They often decide how and when transactions occur in the market.
- Competition is encouraged as there are a lot of manufacturers producing similar goods in a free market. Competition is not as prevalent in a regulated market.
- Red tapes and bureaucracy are absent in a free market. Red tapes and bureaucracy are a cogent part of a regulated market.
- In a free market, there is freedom of entry which encourages entrepreneurship. Additionally, since entrepreneurship soars, businesses have to be creative and innovative in their productions and service delivery to remain in business. In a regulated market, entry is limited by requirements such as licensing, this does not encourage entrepreneurship. Additionally, companies are generally lax about creativity and innovation since their business is backed by the government and will receive patronage irrespective of the products or services they offer.
- The free market is driven by consumer choices as well as the market forces of demand and supply while a regulated market is driven by the government.
- Prices of goods and services in a free market are set based on demand and supply. The government sets the price for goods and services in a regulated market.
- A free market is generally self-regulated while a regulated market is regulated by the government.
- Producers in free markets are profit driven while producers in regulated markets are driven by societal needs.
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Summary of differences between a free market and a regulated market
| Comparison criteria | Free market | Regulated market |
|---|---|---|
| Government role | Limited | Not limited |
| Red tapes and bureaucracy | Nonexistent | Part of the market |
| Competition between producers | Prevalent | Limited |
| Market entry | Free | Limited by rules and regulations |
| Price of goods and services | Set by demand and supply | Set by government |
| Regulation | Self-regulated | Regulated by government |
| Entreprenuership and innovation | Highly encouraged | less encouraged |
| Market drivers | Driven by demand and supply as well as consumers | Driven by the government |
| Manufacturers inspiration | Profits | Societal needs |
In most societies, free markets and regulated markets exist side by side. This is often the case because although there are certain aspects or sectors of the economy that are free markets, some other sectors may be regulated by the government. Free markets in their ideal sense which have no government interference do not exist anywhere in the world as all markets have some level of government intervention.
However, the current free markets have limited government intervention and still enjoy a wide range of freedom such as the freedom to produce goods and services in as many quantities as the producers have the capacity for, the freedom to engage in business with anyone, freedom to invest in various ventures, and more.
Regulated markets often exist to curtail the vices that may arise when producers are left to carry on with their business without any forum for checks and balances to ensure that ethical standards are adhered to. Hence, some regulatory agencies that serve to check some parts of the market in the United States include the Food and Drug Administration, and Environmental Protection Agency amongst others.
