What is an Unregulated Market? Definition and Examples
In this article, we see the definition of an unregulated market and a detailed explanation of the subject matter. We also see whether it is the same as a black market and give a few real-life examples of unregulated markets.
See also: What is a coordinated market economy? definition and examples
What is an unregulated market definition?
The driving forces of this market include supply and demand and then traders frame rules for the conduct of the business and running the market. Oftentimes, an unregulated market suffers from many ills such as unstandardized prices and quality.
Unregulated markets exist mostly found in capitalism and mixed economic systems. This is because these economic systems allow private ownership of property and control of means of production. In other words, private control of trade and industry.
It is for this reason that capitalism is also known as a free enterprise or free market economy since there is no government intervention or regulation in production and the market as well. So with this, a free market economy is defined as an economic system where private enterprises are in charge and there is no government interference. Supply and demand are completely at the discretion of market participants, who also choose the parameters for production and set pricing for goods and services. In this self-regulated market, vendors can also provide any goods at fair pricing.
Some scholars refer to the capitalist system as an unregulated market economy, considering the fact that privately owned businesses manage supply and demand, deliver high-quality products, choose the parameters of production, and determine prices. In a certain economy at a specific time, market actors develop strategies and enable voluntary transactions. Due to little to no government intervention, these marketplaces are free of taxes, tariffs, quality regulations, and coerced or conditioned transactions.
The unregulated market explained
As earlier stated, an unregulated market should not be confused with the free market economic system. Inasmuch as they share the same elements, a free market economic system (capitalism) is an economic system that is characterized by unregulated markets. They are mostly used interchangeably but in real terms, the free market economic system is named based on the fact that markets in this economy are usually free of government intervention and control.
In an unregulated market, private enterprises are in charge and there is no government interference. Supply and demand are completely at the discretion of market participants, who also choose the parameters for production and set pricing for goods and services. In this self-regulated market, vendors can also provide any goods at fair pricing. Here, individuals or private organizations set parameters depending on shifts or changes in consumer preferences and economic situations.
Unregulated markets may seem not to be in existence since governments get involved in virtually every economic activity. With this, some scholars have pointed out that there is no such thing as an unregulated market, however, the few examples we will see in the latter part of this article still show that there were and are still some instances of unregulated markets.
Additionally, producers are free to exchange contracts with one another by adopting policies and fostering free commerce in a specific economic system at a specific period. Businesses are forced to deliver high-quality products in response to customer demand since there is little or no government involvement. Also, there exists an unrestricted system of economic exchange where taxes, quality controls, quotas, tariffs, and other centralized government economic interventions either do not exist or are very low.
Modern civilizations can only approach or approximate this ideal of efficient resource allocation because the free market provides a standard that does not actually exist, and they can be categorized, ranging from low to high levels of control. This in turn calls for government intervention. However, proponents of less regulation contend that if government constraints are lifted, the free market will compel companies to safeguard customers, deliver top-notch goods and services, and set fair prices for everybody. They think that the government is ineffective and only builds a massive bureaucracy that drives up everyone’s cost of doing business.
Those that support government intervention argue that this is necessary to safeguard consumers, the environment, and the general public because businesses are allegedly not acting in the best interest of the public.
Another thing to note in an unregulated market is that there are no conditioned or coerced transactions and it is also characterized by unlimited competition. It can discourage sellers from making excessive profits because of its propensity to keep the prices of goods below the cost of manufacturing. On the other hand, it can lead to a monopoly which usually results when a powerful firm employs certain strategies to eliminate its competitors. In an unregulated market, economic activities are voluntary until centralized authorities take control.
The reason why unregulated markets can be found in a mixed economy is the fact that capitalism and socialism coexist. Therefore, private individuals have the right to control the means of production. Some markets or sectors can be unregulated where individuals and private sectors are dominant in the industry. In the latter part of this article, we will see a few examples of unregulated markets.
See also: Disadvantages of Free Market Economy
Unregulated market scenario
The example below will help one to have a better understanding of the unregulated market:
Andrew made a decision to turn his house into a shop in order to sell mechanical products in his neighborhood. He kept the production low since he was eager to target the locals. He was surprised to find that the community liked his tools.
He was inspired to distribute his tools throughout the city by the favorable response. There, he saw a lot of rivals succeeding brilliantly. He, therefore, focused first on expanding his customer base by providing discounts. As a result, he drove some of his rivals off the market.
By that point, Andrew had amassed sufficient fortune to purchase the remaining rivals. In a few years, he built his monopoly, which soon covered the entire nation. Andrew began establishing his public persona (image) concurrently by making charitable contributions. Additionally, he had connections with government representatives, which he could use to his advantage if a rival brand tried to import a similar product comparable to his own.
Despite his efforts, human rights advocates discovered that he was paying his employees wages that were below the national average. Additionally, Andrew was caught taking advantage of public servants for his own gain. These accusations forced him to appear in court, where he was convicted guilty and given the choice of 15 years in prison or a $50 million fine.
This scenario example showed that the mechanical product’s market was unregulated which earned Andrew some monopoly power and in turn, its abuse. This also indicated that his market power in this respect was high thereby driving other competitors from the market.
Unregulated market and black market
Sometimes, the term “black market” is used to refer to an unregulated market. This is because it involves the sale of goods and services in an illegal, uncontrolled, and unregulated manner. Let us take a look at whether they really mean the same thing. It is important to note that trading activities in an unregulated market are not necessarily illegal but the absence of regulation will over time give rise to illegal activities.
The factor that differentiates a black market from an unregulated market is the fact that it arises when the government attempts to control prices or places an unduly high tax burden on transactions. For example, people who are ready to pay more than the set price will create the supply side of a black market. The supply side of the market is made up of anyone that is ready to give them fuel at a greater price. Similarly, it is likely that there will be a thriving black market where cigarettes are traded for a considerably lower price when the government places a large tax levy on them.
Oftentimes, governments have enforcement departments that look for black market transactions and punish individuals involved in them because they are always illegal. When a nation’s economy has a significant black market component, it may suffer since the government is unable to generate any tax money from it, leading to very inferior public services. Additionally, because so much of the economy is hidden from view, it is impossible to gauge its true scale.
Black markets include a number of drawbacks. One of these is that participants lack any rights against one another that may be enforced in court. Also, there may be a role in organized crime, and a buyer can be forced to accept inferior products or services.
See also: How did the Industrial Revolution Change Society?
Characteristics of an unregulated market
- Private ownership of resources
- Prosperous financial markets
- Freedom to participate
- Freedom of choice
- Self-interest motive
- Competition
- Limited or no government interference
Private ownership of resources
Unregulated markets exist because the private sector, as opposed to a single government agency, owns a substantial percentage of the resources. This gives the proprietors complete control over the methods of product production, distribution, and exchange. Also, private firms and individuals are in charge of hiring as well.
Prosperous financial markets
Although financial markets are prosperous, this is usually not the case when they are unregulated. This is because some firms and individuals gain more advantages than others. This means that some are made better off while others are made worse off.
Freedom to participate
The freedom to participate is another characteristic of the unregulated. It is entirely voluntary to manufacture or consume a certain product. It implies that businesses or people have the right to manufacture, charge prices, or buy as much or as little of a product as they like.
Freedom of choice
In a market that is competitive, owners are free to make, sell, and buy goods and services. There are two things that they cannot completely control. A buyer must initially be prepared to pay the price that the seller has established for their goods or services. Second, the costs associated with producing and selling their goods as well as the price at which they may do so affect how much capital they have. Therefore, freedom of choice is another feature related to the unregulated market. Individuals or private firms can do whatever they desire because there are usually no laws in place to govern their activities.
Self-interest motive
Just as it is in the capitalist economic system, self-interest is a characteristic of an unregulated market and this drives the operations of the players involved. The majority of firms were founded with the owners’ best interests in mind. Here, individuals have the opportunity to work for themselves as well as to attempt to make a living in a variety of ways.
In an unregulated market, suppliers want to sell to the buyer who will pay the greatest price while buyers bargain for the best deal. Even though their motivations are selfish, this ultimately helps the economy as a whole. It establishes a system where prices are established in a way that accurately depicts supply and demand at any particular time. However, this has some disadvantages because of unlawful activities. This is due to the absence of government regulation.
Competition
In an unregulated market, prices are kept low by the pressure of competition. Also, it makes sure that society’s delivery of products and services is more effective.
Thanks to the law of demand, prices rise if demand for a particular good or service increases. Competitors realize that by making more of the same product, they can increase their profit. As a result, there is a decrease in prices to a point where only the top competitors are left.
Consumers and employees are both subject to competitive pressure. Buyers compete for the greatest product at the lowest price, while employees compete for the highest-paying jobs. On the other hand, competition can drive weaker firms out of business since they do not have a competitive edge. If such a market lingers without government regulation, a single firm may drive other firms in the industry out of business or buy over them which brings about a monopoly.
Limited or no government interference
This is the main characteristic that gives rise to an unregulated market. As earlier pointed out, such a market is free from government regulations. Private enterprises are in charge and do whatever they bid in consideration of their interests.
It is important to note that government activity is still present even in commercial economies. It guarantees that the markets are accessible, functional, stable, just, and secure. For instance, many governments establish regulatory organizations to make sure that goods are safe for use and consumption and that companies are not exploiting customers. Also, regulations by the government can also help to guarantee that all people have unrestricted access to markets and information that is free from manipulation. With this, companies with a monopoly or an excessively dominant market share can be punished by the government. This however is not the case with unregulated markets that exist in a commercial economy.
Unregulated market examples
- Bitcoin and cryptocurrency
- Markets during the industrial revolution
Bitcoin and cryptocurrency
One critical example of an unregulated market is Bitcoin. Despite the fact that Bitcoin was established more than ten years ago, governments all over the world are still attempting to control it, and the issue with bitcoin regulation is complicated. For example, shifting perceptions of Bitcoin’s usefulness have compounded issues relating to the best government institution to monitor the cryptocurrency, the terminology to be utilized for developing laws, and even the methodology for creating laws.
Questions have been asked on a regular basis with regard to whether bitcoin is a medium of exchange meant for everyday usage, whether it is a reserve asset used mostly for investments and whether it is a safe haven asset during periods of economic turbulence around the world. Both the alleged Bitcoin specialist and the typical bitcoin investor appear to be in the dark.
One may argue that the fact that Bitcoin is used in investment products like futures is evidence of its appeal to traders. Although none of the major cryptocurrency exchanges that set the price of Bitcoin for futures markets are registered with the Securities and Exchange Commission, the underlying markets for such derivatives are unregulated (SEC).
The above-mentioned mechanism might be destroyed by Bitcoin’s decentralized structure as its network eliminates middlemen and, thus, the components of a government’s system. Since everyone running a full node may create Bitcoin, the currency, there is no longer a need for a central bank. On the Bitcoin network, peer-to-peer transfers take place between two parties, eliminating the need for middlemen to control and distribute money.
In the Bitcoin network, the system of trust that supports the current financial system is transformed into an algorithmic construct. If all full nodes have not given their consent, a transaction is not recorded in the central ledger. Any discrepancy or mistake in a transaction input could lead to its rejection.
Theoretically, the current system may be changed by simplifying interactions between individuals and among different entities on the blockchain of Bitcoin. The financial system is decentralized, and neither a single nor a set of authorities are given the authority to increase or decrease the amount of money. Therefore, in the new system, governments may no longer be necessary to manage and regulate economic policy through intermediaries.
Whether the state and a regulation-free world that proponents of Bitcoin envision actually materializes are still up for debate. Governments are currently attempting to comprehend how cryptocurrencies may affect their economy in the near future. They are specifically battling the three issues listed below that Bitcoin poses.
The first issue is that bitcoin can get beyond the capital limits established by the government. Oftentimes, governments come up with capital control mechanisms in order to curb currency outflows since exports may bring about a decline in the currency’s value. Some see this as yet another mechanism that governments use to manipulate economic and budgetary policy. Since bitcoin is a stateless currency, it can be of great use in certain instances to get around capital regulations as well as to export money.
An example is the fact that China has seen one of the more well-known uses of Bitcoin for capital flight. There is an imposition of an annual cap that amount to $50,000 the purchase of foreign currency by nationals. In 2020, more than $50 billion migrated from bitcoin wallets situated in China to wallets in other nations, according to research by the crypto forensics company Chainalysis. This suggests that Chinese residents may have converted their native money to bitcoin and transferred it across borders to sidestep government regulations.
Another issue related to bitcoin as an unregulated market is that it ties to illegal activity, in other words, there are links between bitcoin and crime.
For criminals, the ability to get around a nation’s current financial system is a blessing in disguise because it allows them to hide their involvement in such operations. Only the network addresses of the users of the Bitcoin can recognize them since it is a pseudonymous network. It might be challenging to determine the origin of a transaction or the person or business behind the address. Also, the algorithmic trust that the Bitcoin network has brought about eliminates the requirement for trustworthy connections at either end of an illicit or unlawful transaction.
Unsurprisingly, Bitcoin is a preferred method of payment for criminals. The Silk Road case is the most well-known example of a bitcoin crime. In a nutshell, Silk Road was a Dark Web marketplace that sold illegal narcotics, weapons, as well as other items. Users could use bitcoins to make payments. The buyer did not confirm receipt of the products until the bitcoin was released from escrow. Because the persons involved in the transaction could only be identified by their blockchain addresses, it was challenging for law enforcement to find them. However, the FBI eventually succeeded in shutting down the market and obtaining 174,000 BTC.
Markets during the industrial revolution
Another unregulated market example is the markets that existed during the industrial revolution. This simply refers to the transition from an agrarian to an industrial economy. The Industrial Revolution, most commonly known as the period of industrialization in the United States, occurred between roughly 1760 and 1840. During this time, new machines that could do jobs more effectively took the role of manual labor and processes. Although this is historical, the manufacturing industries that emerged were unregulated and this makes it a remarkable example.
Because government regulations were absent, new problems were introduced despite the fact that the industrial revolution simplified work and brought about an increase in output. These problems include soil contamination, water pollution, and air pollution, all of which brought about a significant decrease in life expectancy and quality of life. The separation of labor and capital was made worse by the industrial revolution.
Wider economic gap came about as a result of the disproportionate wealth accumulation of those who had control over the means of production. Society was affected by industrialization in numerous ways. In order to find work, workers were compelled to leave their families at the country side and migrate to urban areas. They lived in overcrowded conditions, long hours at work with insufficient rest, physical and health hazards, and ate poorly, which contributed to illness and stress.
These problems gave rise to the emergence of labor unions thereby calling for government intervention. It is for this reason that the activities of our present-day industries are regulated as well as taxes are levied.
See also: Crony Capitalism (Cronyism)
