Just like any other kind of system used to regulate the economy, the free enterprise system has its share of drawbacks and negative effects. The problems arise when the two principle aspects of free enterprise, supply and demand, form situations that financially exploit consumers and producers. The problems also affect the economy as a whole, resulting in recession, inflation and unemployment.
Exploitation of Consumers
While free enterprise works to satisfy the demands of consumers by providing products and services using a readily available supply, this pattern can be interrupted and result in the exploitation of consumers. Free enterprise allows producers purposely to withhold supply from entering the marketplace, causing consumers to pay higher prices. The system also limits the access that consumers have to suitable alternative products.
Exploitation of Labor
Free enterprise is usually profit-motivated for producers in the marketplace. Producers seek the lowest costs in all parts of the production system, including laborers. Laborers are expected to work for low pay in sometimes questionable conditions and with as few benefits as possible. When government or union agencies attempt intervention, producers are apt to outsource work to other laborers who meet their low-cost needs.
Increased Barrier of Entry
In theory, free enterprise should allow for the easiest entry into business and industry by new producers. In practicality, however, the free enterprise system favors producers who have large amounts of existing capital -- money and material -- over producers who have small amounts of existing capital. This often results in industry monopolies that allow producers to exploit consumers by charging prices far above prices that the free market would allow. The situation also makes it difficult for new businesses to enter the industry when top producers have the advantage.
Potential of Corruption
Due to the amount of capital and potential for profit involved in the free enterprise system, corruption can arise from the system. The motive to generate the highest profits and maximize the value generated from capital has the potential to cause unethical behavior, questionable business practices and illegal actions among producers. Consumers suffer the most from corrupted practices.
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