Demerits of a market economy.

• It leads to economic instabilities in a market economy instability is common, prices tend to fluctuate considerably which leads to dissatisfaction.
• It leads to the emergence of monopoly. Inefficient firms are driven out of production leaving only efficient firms in existence resulting into a monopoly situation. Monopoly has so many demerits e.g. consumer exploitation, production of poor quality goods etc.
• Inequalities in income and wealth arise due to the existence of individuals and firms that are able to acquire excessive power in the market. In turn they earn higher incomes and are usually able to pass on the inequalities to subsequent generations. Hence income inequalities generate opportunity inequalities which result into progressive inequalities.
• Consumer exploitation due to consumer ignorance. A market economy assumes the consumer is knowledgeable in as far as what is happening in the market. However this is impossible in the real world consumers are sometimes ignorant of the market prices, they end up buying from expensive sources hence being exploited by sellers.
• Consumer choices are distorted due to persuasive advertisements which tend to push consumers into buying goods that they do not really need or even conform to their tastes. Some time persuasive advertisements make people consume goods which are harmful to their health.
• Divergence between social cost and private benefits. In pursuit of private profits, investors tend to create costs to society but the firms that cause them do not bear such costs in any way.
• Inability to cope with rapid structural changes. In cases where there is need for rapid structural changes the price mechanism fails to allocate resources efficiently and this retards development. This is usually the case when there are new products produced or when there is a drastic fall in demand for a product. Alternatively in times of war, famine, ot other catastrophes the price mechanism fails to allocate resources.
• Inability to allocate resources for public goods such as defence, police and justice. Since public goods are not adequately provided by the market forces, government finds it necessary to provide such vital goods for the benefit of the citizens.
• Leads to unemployment due to competition and instabilities in the economy. Competition tends to drive out firms from business/ production rendering labour and capital unemployed. On the other hands because of imperfect knowledge and immobility of labour there is sluggish functioning of the market system hence failing to allocate factors of production resulting in unemployment.
• It leads to misallocation of resources. Competition results into duplication and wasteful persuasive advertisements which tend to waste resources that would have been put to better use. Besides, due to the unequal distribution the income and wealth, resources are devoted to production of luxuries and other expensive goods consumed by the rich since they have more “votes”. Hence commodities consumed by the poor may not be produced due to the fact that they are not able to purchase large quantities of such goods.