What is a free market system? What are the basic assumptions that a free market system is based on? What are the erroneous assumptions that the free market is based on? Why are they thought to be erroneous?
Your response should be at least 300 words in length.
Explain how the Pareto-efficient allocation of goods also maximizes social surplus. Please provide at least one example to justify response.
Your response should be at least 500 words in length.© BrainMass Inc. brainmass.com December 20, 2018, 1:11 pm ad1c9bdddf
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Free Market System:
The free market system is an economy that enables the market to decide the prices of goods and services through the system of demand and supply and so reflecting individual preferences. The free market system means no government interference or monopoly power that sets prices. It means that the exchange of goods and services between buyers and sellers is voluntary, and the market is decentralized. The consumers are free to make their economic and financial decisions, and suppliers offer their products and services based on demand. The free market system means voluntary exchanges that take place in a given economic environment. The transactions in a free market are spontaneous and through decisions made by individuals or firms. The free market system also means unobstructed competition and only private transactions between suppliers and consumers. The free market system is also used to describe liassez-faire capitalism (1).
The basic assumption of free market system is that customers have perfect knowledge of options, prices, and quality. It assumes that consumers have the goals of maximizing utility or buying the most satisfying products. The firms have a single minded goal of maximizing profits. Also, it is assumed that the factors of production namely capital, labor and buyers are free to go elsewhere. Finally, it assumes that there is perfect competition. There are several producers who compete with each other and no single supplier is large enough to significantly affect the price.
The erroneous assumptions ...
The response provides you a structured explanation of free-market system and Pareto efficient allocation . It also gives you the relevant references.