Question

Using a welfare analysis graph, briefly demonstrate why economists tend to favor free markets. Include labels and units on each axis.

Answer 1

• Free market tends to maximize the output. In other words, free market leads to the output which is greater than the output that prevails in monopoly market.
• Free markets economy maximize outputs provided there are no externalities.
• It maximizes output but does not necessarily lead to the equity.

Following is diagram:

Equilibrium is established at point Z where indifference curve and PPF tangents each other.

Any point in MN PPF show the efficient level of output.

Point below the MN shows inefficient level of output or output is not maximized.