Disadvantages/Demerits of price mechanisms
- It promotes income inequalities. This is because the more resources you have, the more the income. Therefore people who do not have resources remain poor thereby widening the income gap.
- It leads to monopoly tendencies in the economy. This is because the large efficient firms (producers) may force the inefficient firms out of the production process through competition and as a result, they end up restricting output and charging high prices hence exploiting the consumers.
- This system does not cater for public goods which are collectively consumed and that are expensive to produce. For example security, roads etc. This is because such public goods are not profit making.
- It leads to unemployment. Producers aim at maximizing profits and minimizing costs and in the process, they end up using capital intensive production techniques which leads to technological unemployment. In addition, unemployment can also be due to inefficient firms being out competed from the production process and workers from such firms remain unemployed.
- It leads to fluctuation in incomes of sellers. Individuals selling umbrellas and rain coats, their incomes are high during the rainy season and Iow during the dry season which makes planning difficult.
- It promotes the production of socially harmful products. For example cocaine, marijuana, alcohol, cigarette if not restricted. This is because such commodities’ may be fetching high profits to the producers.
- The system undermines the provision of basic and cheap essential goods and services which are non-profit making. This is because the private individuals aim at venturing in activities in which they maximize profits.
- It leads to over exploitation of natural resources. Due to competition in production and lack of government control, the producers may want to produce more output’ hence over exploiting the resources.
- There is consumer’s ignorance due to market imperfections
- High competition is always wasteful as it leads to duplication of activities
- It leads to exploitation of the population
- It encourages speculation and gambling
- It makes government planning difficult
- Price mechanism fail to project future needs
- Excessive price fluctuations
- Failure to respond promptly to immergences such as war and catastrophes.
CATEGORIES Economics
TAGS Dr. Bbosa Science
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