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Voluntary exchange is a transaction where two people trade goods or services freely, there is no coercive or restrictive force involved in the transaction. Both parties want to make the exchange items, and both parties will benefit from the trade.

Voluntary Exchange Explained

The principle of voluntary exchange and market economy was developed by Adam Smith. He theorized that participants in the free market will act in their self-interest, where they will voluntarily exchange goods and services for gaining an equal or higher value by doing the exchange. 

Voluntary exchange is an essential concept in the free market economy. Both classical and neoclassical economic schools agree that in a modern market economy, the players should have the option to exchange goods voluntarily. Everyone with the desire to buy or sell something can make a choice to do that if there is a market for it. For a trade to occur, everyone in the transaction needs to be willing to participate, they must accept the benefit that the exchange will bring to them

When Neoclassical economists theorize about the world, they assume that voluntary exchange is taking place. Mainstream economics uses this assumption and concludes that:

  • Market activity is effective 
  • Free trade has net positive effects on the market
  • The market allows market participants to voluntarily trade to put them in a better situation.

The mainstream economists have then defined that no exploitation in a market offers voluntary exchange; people will not be taken advantage of. The Marxist economist, which is an alternative to neoclassical economics, does, however, assume exploitation. They stated that exploitation can not be tested, meaning you can not determine if someone is being taken advantage of during voluntary exchange.  

The mainstream economist does, however, show that voluntary exchanges are beneficial to the economic effectiveness rather than having exchanges mandated by governments. 

Market Economy

The participants can be broken up into two categories, those that supply the goods and services and those that demand the products and services. The interaction between the participants determines the price of products and services. As well as the allocation of the country’s resources to produce these goods or services.

The government’s role in a market economy is limited to creating and enforcing rules and regulations, such as corporate property rights and limited liability laws, which allow the market to operate efficiently.

Government

The government will not restrict the free flow of products, governments are designed to promote voluntary exchange to increase economic activity and growth. This utility-based approach lets everyone pursue their interest. The modern economic theory also states that trade decisions were based on rationality. Economic systems like communism and socialism don’t allow voluntary exchange since the government regulates a significant portion of the economy for strategic purposes.

Small Businesses

In a small business, it sometimes happens that companies produce more of a product and service that is needed or less of a product or service that is necessary. These companies can then voluntarily take part in the market where they agree to exchange their products or services for money. Other businesses will then decide if they would like to participate in the market, again, this is voluntary.

Voluntary Exchange Example

Example 1

Sandra is a 40-year-old nurse that lives in the United States. In her spare time, she makes matric farewell dresses. Sandra can decide what her price per dress will be and depending on her price, the customers can decide if they would like to buy the dress or not. 

The United States has a market economy, which means that Sandra can sell her dresses freely, and people can buy her dresses freely. They can, however, choose to not buy her dresses if it is too expensive for their taste; no one can force the transaction. Both parties involved need to be willing to conclude the purchase and the government or any other third party does not have a say.

Example 2

A company is willing to pay an employee $15 per hour if the employee can provide a valuable service. Every hour the employee works, they will receive $15, their wage will be determined by the number of hours that they work. The employee voluntarily accepts the salary if he is happy with the payment of $15 per hour.

Voluntary Exchange Conclusion

  • Voluntary exchange is a transaction where two people trade goods or services freely, there is no coercive or restrictive force involved in the transaction. 
  • Both parties want to make the exchange items, and both parties will benefit from the trade.
  • Voluntary exchange is an essential concept in the free market economy.
  • The participants in the market determine the quantity and price of the goods and services
  • The government does not restrict the flow of products or services, their role is limited to creating and enforcing rules and regulations, such as corporate property rights and limited liability laws, which allows the market to operate efficiently.

FAQs

1. What is voluntary exchange?

Voluntary exchange is when two people trade goods or services freely, there is no coercive or restrictive force involved in the transaction. Both parties need to be willing to conclude the purchase and the government or any other third party does not have a say.

2. What are the parts of voluntary exchange?

The parts of voluntary exchange are the two people that are involved in the trade, goods or services, and rules and regulations.
Specifically, these rules and regulations include corporate property rights, and limited liability laws, which allow the market to operate efficiently.

3. Why is voluntary exchange important?

Voluntary exchange is important because it lets everyone pursue their interest. It promotes economic activity and growth. It also allocates resources in a way that will benefit society. Thus, voluntary exchange is essential for a free market economy.

4. What are some disadvantages of using voluntary exchange?

In a free-market economy, if the government did not intervene, when necessary, monopolies and cartels could develop. This would decrease competition and result in higher prices and lower quality goods and services.
Another disadvantage is that producers would produce more of a good in a free-market economy than the government thinks is necessary. This will lead to scarcity, which in turn will raise prices and cause people not to have access to that good or service.

5. What are examples of voluntary exchange?

Example 1: Sandra can decide what her price per dress will be and depending on her price, the customers can decide if they would like to buy the dress or not.

Example 2: A company is willing to pay an employee $15 per hour if the employee can provide a valuable service. Every hour the employee works, they will receive $15, their wage will be determined by the number of hours that they work. The employee voluntarily accepts the salary if he is happy with the payment of $15 per hour.

Example 3: Sam is selling a used car, and Jill wants to buy the car. They agree on a price of $8,000 for the car. Both parties are voluntarily concluding the transaction because they both benefit from it (Jill wants to buy a used car and Sam wants to sell his old one).

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