There are different types of economies that can be in place in any given country. Not every country has the same economy or government. One option that is a bit more unique or diverse than others is a market economy. This is an economic system where all economic related decisions including prices are based completely on supply and demand. This means that no government influence at all is used to determine the prices of any goods or services. This means that a market economy is one that has the least government regulation or approval. The government does not have a say in the economy, when it comes to a market economy.
Pros of a Market Economy
The main benefit to a market economy is that it is founded on the principal of free choice. Market economies are based on the idea that people should be able to choose the services and products that they wish to buy. In some economies these decisions are made by the government for the people, but this is not the case in a market economy.
This capitalist market system is designed to make a market economy incredibly efficient. This type of system works best by making it possible to have the least amount of wasted resources. Everything works in great balance between both manufacturers and the buying public to allow for the best use of resources.
Cons of a Market Economy
Even though the market economy is based on the concept of free choice and allows people to make their own buying decisions, there are a few flaws. Not everything involving a market economy is smooth and there are a few downsides that you must be aware of.
1. Costs of Production
It is important to note that in a market economy the cost of production is not often covered by the supplier. In many cases, the cost of production is often passed to the consumer. Since very little government regulation takes place this means that all consequences of production are not taken into account. For example, if a supplier is making a product that results in high amount of pollution, the cost of this pollution is not factored into the price of production. This means that the supplier is not paying for external factors that are associated with production. All of these costs are based onto consumers at a later time. This means that some government intervention is likely needed.
A market economy is driven primarily by what consumers want. This means that it is not driven by what they need. A market economy often places a different value on goods and services based primarily on the supply and demand. Different services or goods are in demand and others are not. This is what defines a market economy and it is not always ideal.
3. Balance or Compromise
Even though the market economy is not without flaws, it is based on a concept that allows for free choice. It seems as though the ideal economy would have a balance between supply and demand with some government intervention thrown in to ensure that all suppliers are not taking advantage of consumers. The regulation of some services and goods is often needed to ensure order, but a market economy does not have this type of government influence.
How Does a Market Economy Work?
Since the government is not responsible regulations that have an impact on the economy in a market economy, this means that businesses and the citizens of the country are the ones that drive the economic activity. For this reason, a market economy is seen as the opposite of a centrally planned economy. In a centrally planned economy all aspects of the market are overseen and influenced primarily by the government, but this is not the case in a market economy. Government intervention and planning simply are not a part of the market economy system.
What Matters Most in a Market Economy?
Since the government does not have control, the biggest factor in a market economy is supply and demand. Many nations have mixed economies that count on supply in demand in combination with government regulation, but in a market economy there is no real balance. Everything involving the market is driven by supply and demand.
Is a Market Economy Ideal?
Determining if a market economy is the best potion requires you to take a look at both the pros and cons. Not all aspects of a market economy are positive, but not everything can be viewed as a negative either. Before you come to your own conclusion on a market economy, it is a good idea to see this system from both sides. There is great debate involving if any government intervention is needed for an economic system to thrive.