Market Economy (advantages and characteristics)

The market economy is an economic mechanism that denotes the indispensable decisions known as How to produce?Who to produce for? Y What does it depend on? In other words, the issues that must be resolved through commercial exchange.

As there is an effective market economy, the phenomenon of exchange of demand and offer, a real price will be established in the quantity of products, goods and services involved.

What is a market economy?

In short, it is the ordering of the production and consumption of goods and services according to the game of supply and supply. demand, where sellers and buyers freely agree on the prices of said goods, with a minimum participation of the condition.

Conditions for an optimal market economy

• Government entities have the responsibility of providing a legal framework that allows free competition between companies. That is to say that the right to property is respected, that conflicts be resolved when they exist, through instances such as the courts.
• Importance should be given to the proportions derived from the exchange between applicants and bidders, which will stipulate the assignments of goods and services to be produced and consumed, with a deep degree of autonomy of powers or institutions.
• Economic stability allows economic agents to produce and consume expecting an economic benefit or a certain level of benefit, as well as in conjunction with other entities or companies, which lend themselves to interaction with it objective.
• The scarcity of resources allows the development of different actions and new forms of consumption.
• The state or government must promote the protection, control and supervision of the rights of consumers and producers.
• The concept of free trade must ensure efficient resource allocations.

It is worth noting that despite the fact that, in the course of history, the capitalism, the market economy has evolved to this day, as a pillar of the world economy.

However, currently the most advantageous are the mixed market models, since in most nations the economic system assumes free market characteristics and state intervention is possible as planner of the system.

Characteristics of a market economy

These are the basic features:

Determination of prices

The operations of the market economy are coordinated through signals, such as the determination of prices, which are the indicative of the relative scarcity of resources, despite the fact that individuals do not know the background of the processes that generate these signs.

Distribution of income

The income of the contributed elements is exchanged. So in the market if the workers contribute in the production, and the entrepreneurs, machinery and equipment, will receive their corresponding remuneration according to the contribution to production that these goods make.

Recognition of consumer needs

If entrepreneurs are not aware of consumer needs and preferences, they will not be able to adapt to changes of their environment, and will inevitably be forced to be replaced by other companies, generating what we would call destruction creative.

The market economy is decentralized

The basic situations of any economy must be resolved through free exchange between individuals. It would then be a decentralized system.

Advantages of a market economy

We can highlight among the advantages of the market economy the following points:

• The state plays a protective role around property rights and the competitive environment.
• As a result, it generates the optimal use of resources, thus leading to economic growth and increased healthy competition.
• An effective market economy prevents government entities from distorting economic activities according to their individual interests or according to power groups. For this, the authorities must make decisions without having all the information related to costs and preferences that affect the market equilibrium.
• It allows promoting innovation and efficiency in processes, forcing companies to improve their functions and free competition.
• It helps to prevent government entities and institutions from diverting economic activities, preventing them from responding to individual interests.

The main disadvantages of the market economy are as follows:

• It can lead to a poor distribution of resources.
• It can cause problems in terms of efficiency, therefore causing the appearance of externalities or market failures, such as: situations of social injustice, environmental pollution and / or exclusion, which may lead to the intervention of the sector public.
• It favors situations where monopolies or oligopolies originate, which reduces the possibility of healthy competition and fair price control.

Finally, it should be clear that, despite the fact that the market economy is usually considered similar to the free market, the freedom it promulgates is not absolute, since the state participates in the regulation of prices and other decisions.