The concept of market economy refers to a particular form of political-economic system by which the economy is primarily regulated by supply and demand for goods and services in the economic market.
What is market economy?
In societies that base their economic systems on the market economy, it is companies and individuals who decide what and how much to produce for the bazaars. This happens completely automatically through the buyers ‘demand for the supply of products, which are put on the market daily. If demand is high, the price is high, and if demand is low, the price is low.
Market economy is the direct opposite to the planned economy, where the state carefully assesses and determines the prices of the goods. Over the years, market economy and planned economy have both been tested as economic models in various countries around the world. Today, the economies of most countries, especially in the West, are based on market economy models.
The market economy model
Market economy societal models are characterized by the following characteristics:
- Free pricing, where prices are set by supply and demand.
- Free competition where companies compete to sell the best, most, or greatest goods to consumers at the possible lowest price.
- Private property; private initiatives or individuals own the companies and receive the profits or go bankrupt if the company fails to compete.
There is no community in the world that has pure, free market economy, but the United States and England can be said to represent the purest forms of market economy, where public regulations and restrictions are the least.
Market failure and government regulation
Unlike planned economy based societies, where decision-making processes are very centralized, countries applying market economy are mainly decentralized. This means that the state is rarely involved in the production of goods and services. In practice, however, in most economic markets there are various types of market failures which impede the free flow of supply and demand. Such market failures include, among other things, skewed market power (in the form of monopolies and cartels), over-utilization of resources, inadequate public goods and sudden economic crises. Therefore, the state intervenes in economy to regulate the various economic areas. In addition, the state can intervene in the economy in order to fulfill political goals to change the distribution of society’s resources.