Market Economic System

What is the market economic system?

In a  market economic system or free market economic system, resources are allocated by the market. The price mechanism is key to the allocation of resources. Market forces such as demand and supply decide which goods will be produced, in what quantity, and at what price. A market economic system has little or no government intervention and lacks a public sector.

What are the benefits of a market economic system?

• Firstly, a range of good quality products will be produced as private firms compete to satisfy consumers and make maximum profit.

• Producers will produce the products in demand because of the incentive to make maximum profits. 

• Furthermore, Producers will allocate resources most efficiently and cost-effectively because of the motive to make maximum profit

• Very few taxes and regulations are present in the market economic system

What are the drawbacks of a market economic system?

A market economic system or a free market economic system is an economic system with little or no government intervention and the absence of a public sector. This economic system has several drawbacks. Firstly, the profit motive encourages firms to only produce the most profitable goods. Public goods such as streetlights will not be produced as they are non-excludable and non-rivalrous. Merit goods that are economically and socially desirable such as education and healthcare will be underproduced and socially and economically undesirable demerit goods may be overproduced if profitable.

• Firstly, the profit motive encourages firms to only produce the most profitable goods.

• Public goods such as streetlights will not be produced as they are non-excludable and non-rivalrous.

• Merit goods that are economically and socially desirable such as education and healthcare may be underproduced.

• Socially and economically undesirable demerit goods may be overproduced if profitable.