Disadvantages of Market Mechanism are given below:
(i) There is as much evidence of market failure as there is of failure in state intervention. Both market and government are imperfect alternatives.
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(ii) Market can only serve those who are part of the market system. It is a good servant but a bad master.
(iii) Market forces lead to sometimes misallocation of present and future resources or at least to one which may not be in the best long-run social interest, as the process fails to take care of priorities.
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(iv) Market mechanism fails to provide a proper guideline for using appropriate material for selecting project. It diverts investment to those directions in which profits are high, neglecting socially desirable low profit ventures.
(v) Do not bring competition in fullest sense.
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(vi) They often lead to the creation of monopolies and oligopolies.
(vii) In less-developed countries or economies, market prices of such factors of production such as labour, capital and foreign exchange deviated substantially from their social opportunity costs and were not therefore, a correct measure of the relative scarcity or abundance of the factor in question.
(viii) Market forces by themselves, cannot overcome the deep-seated structural rigidities in the economies of developing countries.
(ix) Market as a mechanism does not ensure that individual decision will optimize economic performance in terms of society’s preferences and economic goals.
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(x) It does not ensure that the prosperity at the top will trickle down to the bottom.
(xi) Externalities: Because of externalities many projects that developing countries need, which would be profitable to society, may not appear profitable under a pure market system in which all investment divisions are left to private individuals.
(xii) The level of investment may fall below the social optimum,
(a) Because private investors ignore the external economies and supplementary benefits of profits in calculating prospective returns
(b) Because the element of risk will be higher for a series of uncoordinated individual projects than for a coordinated investment programme systematically undertaken through some central direction.
(xiii) Market mechanism is unlikely to produce the rapid structural changes which development requires.
(xiv) Absence of guarantee in a free market setting that the supply of “development” good & factors of good will is forthcoming in quantities required. Supply may be completely price inelastic, in which case there are little alternatives to the public provision of the goods or factors in question.
The inefficiency or absence of well organised commodity, factor and capital markets is said to reduce considerably the ability of the Less Developed Countries economic system to function effectively without some form of external interference.
Thus, for a variety of reasons, it is argued that interference with the market mechanism is a necessary prerequisite of a more rapid pace of development.
Whatever form of interference with the market takes, however, it will inevitably involve some degree of state intervention and control over the means of production, distribution, exchange and the partial replacement of market mechanism.