Market economy

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A market economy is an economy in which goods and services are traded, with the price at which goods and services are exchanged being determined by trades that occur as a result of sellers' asking prices matching buyers' bid prices.

In a market economy, ask and bid prices are typically understood to be the result of subjective value judgements, with potential buyers bidding up to, but not more, than they are willing to pay for a good or service and potential sellers offering a price down to, but not lower, than that which they are willing to depart with a good or service. When these prices allign, a trade is made, and exchange price is determined. Bid prices are influenced by competition among buyers and ask prices are influenced by competition among sellers.

The complex interplay of supply, demand and price tend to result in a thriving ecomony - according to advocates of free markets. But critics claim that factors such as greed for profit distort the situation so much that the only fair system would be a planned economy (see also socialism).

A market economy that has little or no governmental intervention is called a free market.

Entrepreneurship implies that business owners make decisions about their activities in such a way as they deem fit to make profit. Individual market participants, such as privately owned businesses, agencies controlled by the state and consumers buy and sell their products on markets.

According to Adam Smith, even if every individual market participant were to act selfishly, this would benefit the economy as a whole. However, it is often said that "market failure" is a frequent occurrence in free market.

Some believe government should intervene to prevent market failure while preserving the general character of a market economy, while others believe that government's should not diminish market freedom to remedy what some regard as market failure. The theoretical model of a large-scale free market economy does not occur in reality, however free market transactions may take place in the underground economy.

In the model of a social market economy the state intervenes where the market does not fulfill the needs of the market participants. This concept is based on the ideas of John Rawls.

Market economies are generally linked to capitalism. But not in all cases. It is a very strong way for new countries to flourish and earn a good trade representation for themselves.


Free market economy

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Adam Smith's theory


The\economy" is usually associated with capitalism.

Market Failure

Examples of market failures include: negative externalities, monopolies,lack of provision of public goods, and social disparities such as extreme poverty. These failures are the reason some think limited government intervention is paramont.

Government Intervention

It is possible for a market economy to have government intervention in the economy. The key difference between market economies and planned economies lies not with the degree of government influence but whether that influence is used to coercively preclude private decision. In a market economy, if the government wants more steel, it collects taxes and then buys the steel at market prices. In a planned economy, a government which wants more steel simply orders it to be produced and sets the price by decree. An economy where both central planning and market mechanisms of production and distribution are present is known as a mixed economy.

The proper role for government in a market economy remains controversial. Most supporters of a market economy believe that government has a legitimate role in defining and enforcing the basic rules of the market. More controversial is the question of how strong a role the government should have in both guiding the economy and addressing the inequalities the market produces. For example, there is no universal agreement on issues such as protectionist tariffs, federal control of interest rates, and welfare programs.

Comparison to planned economies

In the 1980s, most of the planned economies in the world attempted to transform themselves into market economies, for various reasons and with varying degrees of success. In the Soviet Union, this process was known as perestroika while in China the creation of a "socialist market economy" was one element of Chinese economic reform.

"In a planned economy those with political power make up the plans, in a market economy those who have money make up the plans" is a common joke in Central European countries who have experienced planned economy and are now experiencing market economies.

Criticism of market economy

See also

de:Marktwirtschaft es:Economía de mercado fr:Économie de marché nl:Markteconomie ja:市場経済 ru:Рыночная экономика sk:Trhová ekonomika fi:Markkinatalous sv:Marknadsekonomi zh:市场经济

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