Characteristics of a Market Economy - Coursework Example

Running Head: Market economy Market economy Customer’s Name: Institution: Customer’s Course Tutor’s Name March 11, 2013. Market economy A market economy is said to be that system of the economy where decisions regarding the economy are made. Such decisions may include pricing of goods and services. This system is guided by the interaction that exists between businesses and citizens of a country. It therefore stipulates that the government is less involved in the market system thereby less interaction should be involved if the market considers itself to be free. As opposed to a central planning in the economy, the government in such an economy is the one held responsible for any decision making policies. This thereby means that market economies work on the assumption of market forces that consists of demand and supply of goods and services (Rao, 1998). These two aspects are the best basis to decide what is good for the country in terms of economic decisions made by the producers and consumers. In a country that takes these determinants, the government is less involved in activities such as fixing of prices and industrial subsidization. Having done a research on most developed countries, it has been found that they practice mixed economies but in a way practice market economies where market forces are the main determinants of economic activities and decisions. This thereby makes them involve the government in some ways as it is seen as an approach to establish their stability. Market economy in recent decades have been entirely a requirement rather than a choice in a global market setting but there is an answered question of if the government really needs to participate in such economies in order for the markets’ operations to be efficient (Sirico, 2012).The best advantage a market economy is said to have is the flexibility exercised in demand and supply as customers are always willing to pay any price for the goods and services they desire. Characteristics of a market economy There are various characteristics possessed by a market economy and to start with, it should have limited government control. The only work that the government is authorized to have is to make sure markets are working effectively and efficiently. Some of the responsibilities that it should have are providing for the country security in the economy so that no other country can disrupt the economy. It should also make sure that there are equal opportunities given to citizens to enter the market. This as an example is where they charge heavy penalties to monopolies as though they are important to the economy; they limit other investors from starting similar companies. It is the work of the government to ensure that fairness is conducted in the market in terms of information and resources (Sirico, 2012). Competition is another feature of a market economy where it is through competition that prices are moderated and there is efficient provision of goods and services. Taking the law of demand, an increase in demand of an item translates to an increase in price. Competitors may take this opportunity to come up with better production meaning increased supply of products thereby lowering the price. Due to the availability of substitutes there is equal sharing of profit by all investors and reduces the pressure a consumer may have in adding an extra amount to purchase something. Only the strong competitors are able to withstand competition and it is through them that a market economy is created. A market economy owns private property where goods and services belong to individual or a group. This therefore makes the sellers have the ability to enter into contracts where they can negotiate with the buyers on the terms and conditions they seem comfortable with. It is through the legality of owning individual property that investors have a right to acquire profit (Rao, 1998). Motive of self interest is another characteristic in a market economy. This is due to the fact that sellers try to sell their products to the highest bidder and at the same time, the sellers are willing to pay a lesser amount for the goods and services that their buyers want. This can be a contradiction as the sellers are seen to have a selfish interest as opposed to the buyers but this technique works best for the economy given a long run period of investment. A market economy is heavily reliant on a market that is efficient which guarantees a place where consumers and producers can buy and sell services and goods. This is defined as market and prices systems where there is equal access of both buyers and sellers. This also means that they all have access to the same market information which they use to base their decisions. With the help of market forces, prices voluntarily rise and fall based on the law of demand and supply. Freedom of choice is another feature that a market economy has (Lavigne, 1995). There is freedom of choice for both buyers and sellers to sell and purchase products and services. In a free market, the only restricting limitation is the price at which they would like to buy or sell due to the market forces or the amount of capital required to buy or sell a product or a service. Role of the government Though there are many advantages attributed to a market economy, the government has to come in to help in situations of competition. A market economy will only be reward those that are good in terms of finances. This is seen in a society where those that are rich have the best of everything leaving behind those that are poor with nothing or very little to keep them going. This places some members of the society at a disadvantage as market economies work with their own interest in mind hence the need for the government to be involved in the economic system (Sirico, 2012). At times, confusion is experienced when the government is involved in the affairs of a free market economy leaving both producers and consumers wondering why the market economy should be called free in the first place. Where a government takes any control of a market, it ceases being free because the government now has the ability of saying or deciding anything they deem suitable for the economy. Though a free market economy, a market cannot be entirely free due to restriction of some activities by the government (Lavigne, 1995). Any government stepping in a free market economy stipulates that it has to play some functions. One of the major roles that it has is to ensure continuity in any kind of business. This seems to be easy but it takes time for the government to ensure that all businesses are functioning according to the set policies and standards. It is the work of the government to ensure that individual rights are protected and guaranteed and come up with institutions that will be assigned responsibility over these rights. It is also the role of the government to ensure that there is a safe political climate that ensures a stable economy (Sirico, 2012). The government should provide a guaranteed safe playground for business people to survive. The government is therefore to partner with all investors to ensure a healthy competition is being carried out for both local and private investors. It is through maintaining of competition that markets act towards consumer sovereignty hence antimonopoly laws are set by the government to regulate on all the businesses. It is the government’s role to provide growth and sustainability in the economic activities such as eradication of inflation, reduction of unemployment and coming up with measures of increasing growth domestic product of the country. It is through the government that policies such as fiscal and monetary are regulated to come up with a better market economy. Redistribution of income is another task the government has in the economy and through this; a country’s welfare is meet. This includes activities such as provision of social security, provision of relief to the poor and unemployed and allocation of medical programs that the private investors might not take much concern about (Samuels, 1989). A market economy has to have a legal structure in order to conduct its business. This is where the government comes in to ensure stability in the economy. The government comes in to impose penalties on businesses acting against the rules of the market and act as referees to watch over all businesses in their transaction activities. Most of the investors are in business purely to make profit and though they have a role to play in social responsibility, it may be difficult to them to achieve social and business tasks due to capital base limitation. The government comes in to ensure that the space is filled where public goods such as security, medical care, education and judicial systems are provided free of charge. It can generally be argued that though a market is said to be free, it is not entirely free due to some responsibilities it cannot meet on its own (Medema and Boettke, 2005). This can largely be due to the amount of capital required to initiate this activities. References Lavigne, M. (1995). The economics of transition: from socialist economy to market economy. New York: St. Martin's Press. Medema, S. G., & Boettke, P. J. (2005). The role of government in the history of economic thought. Durham: Duke University Press. Rao, C. P. (1998). Globalization, privatization and free market economy. Westport, Conn.: Quorum Books. Samuels, W. J. (1989). Fundamentals of the economic role of government. New York: Greenwood Press. Sirico, R. A. (2012). Defending the free market: the moral case for a free economy. Washington, DC: Regnery Publishing. Read More