A market economy is a type of economic system where supply and demand regulate the economy, rather than government intervention. A true free market economy is an economy in which all resources are owned by individuals. The decisions about the allocation of those resources are made by individuals without government intervention.

Features of Market Economic System

  • Resources are privately owned by Individuals or Firms
  • Profit is the main motive
  • Consumer Sovereignty
  • Price Mechanism helps determine prices of commodities
  • Little or no government interference

Advantages of Market Economic System

  • Efficiency: Competition helps to ensure firms produce exactly what the consumers wants.
  • Freedom of Choice: Consumers are free to choose whatever goods suits their style without being limited by the regulations or policies.
  • Quick response to Consumer’s Complain: Since it is a profitable venture, every firm will respond quickly to the complains by the consumer to make their goods or services better for them to patronize more of it.

Disadvantages of Market Economic System

  • Encourages production of Harmful Goods: If there are people in the market who wish to buy dangerous goods like narcotic drugs, the market will be ready to buy it since private firms will be willing to provide anything that is profitable.
  • Factor of Production would not be employed if not profitable: In a market system, producers do not produce a good or a service if it is not profitable. But sometimes it may be necessary to produce some goods even if it is not profitable. Therefore Market system will fail in this aspect.
  • Production may lead to market failure: When firms are always trying to maximize their profits, they may ignore external costs like damages to the environment.
  • Income & Wealth Inequalities: When firms and individuals are able to produce and consume freely, it may make the rich even richer because they have more decision making power, and the poor may become poorer because they have less decision making power in the market. The market system allocates more goods and services to those consumers who have more money than others.
  • Certain goods or services would not be provided: Private firms in a market system will not be willing to provide certain public goods like street lights because it is almost impossible to charge any payment from the consumers.