Mechanisms of markets

In economics, a market that runs under laissez-faire policies is a free market. It is “free” in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, price ceilings, etc. Market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse effect on market participant’s welfare and reduce the efficiency of market outcomes. Also, the relative level of organization and negotiating power of buyers and sellers markedly affects the functioning of the market. Markets where price negotiations meet equilibrium though still do not arrive at desired outcomes for both sides are said to experience market failure.

Markets are a system, and systems have structure. System works fine when the structure of a system is in good condition. Structure of a (utopistically) well-functioning market is defined in theory of perfect competition. Well-functioning markets of a real world are never perfect, but basic structural characteristics can be approximated for real world markets, for example

· many small buyers and sellers

· buyers and sellers have equal access to information

· products are comparable

Buying and selling in well-structured markets creates a price that satisfies both buyers and sellers, not buying and selling alone as the free market proponents tells us. For example, trade unions are sometimes accused of spoiling the market mechanism of labour markets, in reality it is the opposite: blue collar trade unions make the buyer and seller more equally powerful when they negotiate the price for a working hour. When the buyer and seller are equally powerful, then the price for a commodity is acceptable to both parties.