Free Enterprise: Definition, Features, Pros & Cons

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What is Free Enterprise System?

Free enterprises system is an economic system that believes in the efficacy of the interplay of market forces of demand and supply in the allocation and distribution of scarce societal resources.

Free Enterprise System
Free Enterprise System

Free enterprise economic system believes in the right of individuals to-own any property through legal means. Countries practising this system include the United States, Canada, Japan, etc. The principal function of government is enforcement of the rights and responsibilities of private ownership.

Features of Free Enterprise | Economy System

  • There is no restriction to the ownership of wealth and all factors of production.
  • People are free to choose their occupations as far as their abilities and the opportunities of their economic and social environment permit.
  • There is the existence of competition which encourages specialization, research and innovation.
  • Prices of all goods and services as well as factor inputs are determined by the forces of demand and supply.
  • The pursuit of profit is an important feature of a capitalist system. The profit motive prompts individuals, entrepreneurs, producers or business enterprises to undertake a business.
  • The government’s major role includes the provision of the institutional and legal framework to facilitate the working of the economy and the provision of public goods and the regulation of monopolies.

Advantages of Free Enterprise System

  • Competition and rivalry lead to efficiency and full utilization of societal resources both human and material.
  • There is a lot of freedom regarding what and how much you want to buy or sell.
  • People have the incentive to work hard, be innovate and make discoveries because the reward system is adequate.
  • Freedom to own properties and factors of production.

Disadvantages of Free Enterprise System

  • It may lead to high income inequality in the society.
  • The weak and the handicapped may not be adequately catered for by the system.
  • Because the system is propelled by profit motives, unemployment of both material and human resources may be high in the face of deficient demand. Cases of strikes, closures and layoffs, may also be rampant.
  • The costs/prices of social goods and services like water, health, education and energy may be very high because they are usually provided by private enterprises.
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