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Free in Free Software is referring to freedom, not price. Having been used in this meaning since the 80s, the first documented complete definition appears to be the GNU's Bulletin, vol. 1 no. 6 , published January 1989. In particular, four freedoms define Free Software: 
The freedom to run the program, for any purpose.
Placing restrictions on the use of Free Software, such as time (``30 days trial period'', ``license expires January 1st, 2004''), purpose (``permission granted for research and non-commercial use'') or an arbitrary limitation of geographic area (``must not be used in country X'') makes a program non-free.
The freedom to study how the program works, and adapt it to your needs.
Placing legal or practical restrictions on the comprehension or modification of a program, such as mandatory purchase of special licenses, signing of a Non-Disclosure-Agreement (NDA) or - for programming languages that have multiple forms or representation - making the preferred human way of comprehending and editing a program (``source code'') inaccessible also makes it proprietary (non-free). Without the freedom to modify a program, people will remain at the mercy of a single vendor.
The freedom to redistribute copies so you can help your neighbor.
Software can be copied/distributed at virtually no cost. If you are not allowed to give a program to a person in need, that makes a program non-free. This can be done for a charge, if you so choose.
The freedom to improve the program, and release your improvements to the public, so that the whole community benefits.
Not everyone is an equally good programmer in all fields. Some people don't know how to program at all. This freedom allows those who do not have the time or skills to solve a problem to indirectly access the freedom to modify. This can be done for a charge.
These freedoms are rights, not obligations, although respecting these freedoms for society may at times oblige the individual. Any person can choose to not make use of them, but may also choose to make use of all of them. In particular, it should be understood that Free Software does not exclude commercial use. If a program fails to allow commercial use and commercial distribution, it is not Free Software. Indeed a growing number of companies base their business model completely or at least partially on Free Software, including some of the largest proprietary software vendors.
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The Advantages of Free Software
Copyrighted software is often prohibitively expensive. The standard price for an ordinary office package might be a year's income for most of the world's people. As one Mexican project adopting free software wrote:  "The primary reason for reaching this decision was the kind of money we would have had to pay if we went for proprietary software: at US$55 for each machine with Win98 and Office, US$500 for every NT license and an average of six workstations and one server for 140,000 labs, that's a lot of money."
Though "discounts" are often available on software, these tend to either be in exchange for accepting a local monopoly for the vendor's products, or an attempt to gain market share at the expense of competitors. Consider, for example, Microsoft's attempts to influence universities and colleges into going all-NT.
So called software piracy is obviously an option for those unable or unwilling to purchase software, and indeed it is a common choice throughout the countries where copyright law is poorly enforced. But this places users at the mercy of the law, increasing their vulnerability to those rich and powerful enough to use it to their own advantage. Also, development organizations themselves are vulnerable to enforcement in their home countries, so they cannot support or encourage such practices.
As well as the up-front costs of software, there are usually hidden costs. Often licensing is per-user, so costs will increase with the size of the user base and inhibit growth. Support for proprietary software is almost always prohibitively expensive. Frequent software upgrades may be required to maintain compatibility and functionality (consider the deliberate modification by Microsoft of the file format in successive versions of Word, in order to force users to upgrade to newer versions). And software tends, especially with upgrades, to require more powerful, and hence more expensive, hardware. These hidden costs are often recurrent.
Software Quality & Reliability
Software has a tremendously broad reach in today's society. Almost every person in the United States is affected by software, either directly or indirectly. Everything from surface mail and phone calls to airline flights and Internet-based commerce is handled by software. When the software behind these various activities is of higher quality, people that use this software benefit because it performs better and is more reliable.
They are happier because their airline flights are on time. This means people are less likely to miss an important meeting or a connecting flight at their destination. Internet orders are more likely to arrive correctly, meaning that the birthday gift for someone would be timely. To put it another way, poor software quality causes a great deal of harm. Errors in billing, credit reports, tax records, and the like are but a few examples of things attributed to software glitches. Any of these things can cause significant harm to people or companies. People can be unfairly targeted by collection agencies. They may waste money defending themselves against something they didn't do. Time is lost dealing with those people. A rejected loan, for example, could mean that a growing family can't get a larger home that they need. All of this can lead from low-quality software - and it does happen.
Some free software products are widely recognized as more reliable and robust, more powerful and more secure than their proprietary counterparts. A plausible argument can be made that this is not just accidental, but a consequence of their open development, implementation and testing.
Free software was not an alternative to copyrighted software. Many people argue that free software is far superior to commercial software. Rob Bos says the following in an article in 32 bits online:  "Free software is better than non-free software. It works better, it works faster, it works longer. Open source programs are tried and proven, they are constantly pressed from every direction to do specific tasks, and do them well; and for the simple reason that they are written to work, not simply to sell copies. Free software doesn't just work better, it works orders of magnitude better. Open sourcing an application gives the source code to a large number of developers, instead of a small, tight group. Free software projects have a pool of developers and an effective budget multiple times higher than an equivalent proprietary development project, and will, given all other equal things, advance at a rate many times faster because of their access to an much larger development team. Peer review of code isn't just a pipe dream, it is an essential means to writing superior applications, no matter where they are written."
Moreover, in the free software world, anyone can fix a problem with the software in use. With proprietary software, when a bug is found, even if it is serious, it often takes a long time for it to be fixed, if it ever is. A lot of things can go wrong. If the original manufacturer of the software program no longer exists, and the source to the program is not available, it is generally impossible to fix the problem. If this program is essential to someone's business and no longer works, the company has a big problem. Free software presents a better alternative. When you find a bug in your software, you can fix it yourself instead of depending on the original vendor to fix it. Or, somebody else can be hired to fix the problem. This instantly takes a difficult, possibly insurmountable problem with software, down to something that could be fixed in a matter of hours or even minutes in many cases - a clear benefit of free software.
Security and Privacy
Security is one of the most complex areas of software development, requiring expert programmers to write secure code and find security problems in existing code. With closed software, the number of people that are able to review the security of code is limited to a miniscule fraction of the total programmers that could do this.
There are many instances of security problems in closed-source software that never existed or have long ago been fixed in free software. These problems often can cause serious loss of important data, which can easily lead to devastating consequences. For instance, on July 8, 1997, the United States Coast Guard's database server crashed and remained down for 1,800 hours while 115 employees worked to restore the data.  In the first week of March 1998, attacks caused thousands of Windows NT systems to crash, exploiting a security hole in that proprietary operating system, including some particular sites that suffered over one hundred failures. These are just a few examples of exploitation of closed software bugs by crackers - bugs that are not present in free software.
Many popular security systems and encryption algorithms are presently compromised, but manufacturers of such software continue selling it. This is often because others cannot review the code, and the manufacturers themselves may not even possess the knowledge necessary to find or fix the problems.
Software developers can conceal security holes in their software, intentionally or unintentionally. The end result is that people think that their data is secure when it really may not be. The consequences of this can result in loss of utility. A simple hypothetical will suffice: if the data on a courtroom computer holding privileged information about people's criminal records is leaked, people's careers and lives could be destroyed based on that information. Other cases of broken security could have a serious effect on national security, even causing loss of life in some situations.
When we have free software algorithms, we can be absolutely certain about their security level. This places the power to decide whether a given algorithm is appropriate in the hands of the users of it, not its author. The users of such algorithms can have a high degree of confidence that it is sufficient for their needs, thus increasing utility by decreasing not only the chances of compromise, but also extra efforts and worry needed to deal with it.
In order to be a good programmer for something as complex as an operating system, years of experience with programming are generally required. One can learn the basic concepts behind programming, but this doesn't give much “real-world” experience. One tremendous benefit of free software is that every free software program instantly becomes a valuable educational tool.
One great way for programmers to learn is to look at good code from others. This is precisely the sort of advantage that free software provides. Programming students can study or even modify the internal workings of the Linux operating system as class projects, for instance. Hands-on experience with a modern operating system is a great way to learn skills.
Another benefit here is that students can use, at no cost, a free software operating system such as Debian GNU/Linux or FreeBSD at home. This gives them the same computing environment as they get at their place of learning, with the added benefit that they can tinker with the source code to every part of the system to their heart's content.
The free software concept offers ideal ways to not only get started with programming, but incentives to keep going. There's a certain feeling of satisfaction for a programmer when he makes his first patch to the Linux kernel or fixes a first bug in an e-mail client. Having the source to tinker with is an excellent opportunity to recruit people.
Governments attitude toward Free Software
Government representatives said they have looked into open-source software as a way to cut costs. "One thing is for sure: open source will be an issue," said Fred Arne Odegaard, assistant IT consultant with Norway's Department for Trade and Industry. "Contracts with Microsoft are getting more and more expensive." 
The country's head of IT systems at the Ministry of Culture, Bruno Mannoni, said the department has cut back on expenses since it began replacing 300 of its servers running Windows NT and Unix to open-source alternatives. "It's working out to be a lot less expensive and a lot more reliable than what we used before," Mannoni said.
Price aside, government officials around the world are also looking for ways to increase use of local software and curb the export of IT funds to major U.S. companies. That is the case in a number of countries in the Asia-Pacific region.
Thailand and the Philip pines:
Government-funded computer research centers have created their own open-source software applications that they are distributing to government users and small businesses. By offering essentially free operating system software for servers and desktops, they expect to make computer technology more accessible and aid the local economy in their countries.
Government officials have announced intentions to pursue open source over major commercial applications in part to rein in Microsoft and preserve room for competition within the local software industry.
Government announced a deal to replace parts of its IT system with open-source programs. 
Government has been testing StarOffice and OpenOffice for use by some of its government agencies; early results reveal some incompatibilities for users trying to open Microsoft Office documents in the open-source alternative. "We recommended open source only for people who don't exchange documents with other people," said Arja Terho, a counselor in Finland's Ministry of Finance. 
Utilitarianism says “an action is morally right if it produces the greatest happiness for the greatest number of people affected by it". In other words an action can be judged good or bad based on the consequences or results. If the consequences are good than the action is considered morally correct, otherwise not.
Most of the advantages of free software mentioned above end up being in higher-quality software, lower cost, and smaller development time. All of these lead to tremendous benefits for mankind except for proprietary software vendors.
Rights Approach based on moral rights: the right to the truth, the right of privacy, the right not to be injured, and the right to what is agreed.
Journalist Dave Imis' says, "Restricting access to information and ideas in the name of copyright protection is an implicit form of filtering…it is not content of allegedly dubious quality that is being filtered from sensitive individuals but people being filtered from accessing content". 
From this perspective, proprietary software is a blatant form of discrimination that denies admission to groups without financial resources to pay excessive subscription fees.
Fairness or Justice Approach were you minimize favoritism and discrimination (Does everyone get treated in the same way?)
Comparing to proprietary software vendors who make a big fortune by selling copyrighted software, is it fare that open source software developers remain unpaid? Free software can be view as the contribution of all mankind. Everyone joins the development, contributes himself so that everybody should share this property.
Form the other standpoint, is it fair to make some minority that rich? For most of individuals or people from poor nations, they have less chance to create such a fortune. Therefore, it’s the discrimination that fairness approach tends to prevent.
 FSF Europe Document
 Linux in 14,000 Mexican Schools
 32 bits online
 Laura DiDio. U.S. Coast Guard beefs up security after hack. CNN/Computerworld, July 22, 1998.
 David A. Wheeler. Why Open Source Software/ Free Software (OSS/FS)? Look at the Numbers! December 31, 2003
 “Frameworks of ethical analysis “ From Chapter 2, Case Studies in information and computer ethics by Richard Spinello