Why might free markets not ensure equitable resource allocation?

Free markets may not ensure equitable resource allocation due to income inequality and market failures.

In a free market economy, resources are allocated based on the forces of supply and demand. However, this does not necessarily lead to an equitable distribution of resources. One of the main reasons for this is income inequality. In a free market, individuals with higher incomes have more purchasing power, which allows them to command a larger share of resources. This can lead to a situation where the rich get richer while the poor get poorer, as those with more resources are able to invest and grow their wealth, while those with fewer resources struggle to meet their basic needs.

Moreover, free markets can also lead to market failures, which occur when the market does not allocate resources efficiently. This can happen in several ways. For instance, public goods, such as roads and parks, are typically under-provided in a free market because they are non-excludable and non-rivalrous, meaning that individuals cannot be prevented from using them and one person's use does not reduce their availability to others. As a result, private firms have little incentive to provide these goods, leading to under-provision.

Externalities, or the costs or benefits that affect a party who did not choose to incur those costs or benefits, are another form of market failure. For example, pollution is a negative externality that affects everyone, not just the polluter. In a free market, firms may not take into account the social cost of their actions, leading to over-production of goods that cause pollution.

Furthermore, free markets can lead to monopolies, where a single firm dominates the market. This can result in higher prices and lower quality goods and services, as the monopolist has little incentive to improve due to lack of competition.

In addition, information asymmetry, where one party has more or better information than the other, can lead to adverse selection and moral hazard. For example, in the insurance market, those with high-risk behaviours are more likely to buy insurance, leading to higher premiums for everyone.

In conclusion, while free markets can be efficient in allocating resources, they do not necessarily lead to an equitable distribution of resources. This is due to factors such as income inequality, market failures, and information asymmetry.