Features, Advantages and Disadvantages of market economy

By | July 12, 2013

1.1.1            Features of market economy

 

A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand and the prices of goods and services are determined in a free price system (Altvater 1993). In defining a market economy, the US Department of Commerce considers six criteria: (a) currency convertibility; (b) free bargaining for wages; (c) the extent to which joint ventures or other investments by firms of the foreign countries are permitted in the foreign country; (d) the extent of government ownership; and (e) the extent of government control over the allocation of resources and over the price and output decisions making. And also to differentiate the market economy and non-market economy the US Customs Codes defines a “nonmarket economy country” as “any foreign country that the administering authority determines does not operate on market principle of cost or pricing (Åslund 2007, p.2).

 

1.1.2            Advantages of market economy

 

1.1.2.1      The market economy and the speedy dissemination of new technology

 

According to William Baumol and Alan Blinder (2011, p.324) one attribute of the market economy that is vital for its growth is the fact that new technology now spreads with impressive speed, meaning that obsolete products and processes do not long survive or hold back economic growth. The evidence indicates that dissemination is not only surprisingly rapid but has also been growing more so with remarkably consistency for more than a century.

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Figure 1 The speeding up of technology dissemination from 1750 to 2000

Source: Baumol, W. & Blinder, A. 2011, Economics: Principles and Policy. Masons: South Western Cengage Learning. p.324

 

And also a World Bank report also concluded that for the past more than 200 years, the global dissemination of technology have been speeded up obviously. And because of the market economy’s facilitation of the technology dissemination by casting no restrictions over the business activities and even encourages the free flow of the market factors that include advanced technologies, one of the advantages of market economy is that it is in line with the increasingly accelerating technology dissemination in the nowadays.

 

1.1.2.2      Effective price mechanism

 

According to Danny Myers (2011), a central feature of free market economy is the price mechanism, prices are used to signal the value of the individual resources, acting as a kind of guidepost which resource owners such as producers and consumers refer to when they make choices. Typically when supply exceeds demand, a price change occurs which brings the producers and consumers into harmony. This is precisely that what happens during the season change sale. Conversely, when demand exceeds supply, the price of goods in question will rise until the market is in balance. Prices, therefore are seen to generate effective signals in all markets including the factor markets. On the other hand, the free market with effective price mechanism also enable the human desires to be satisfied in a fast speed. For example, when people are getting in love with India style wearing, the prices of these Indian style clothes would raise because of the sudden increase of the buying behaviors of these products. Soon after the price increase, the garment producers would recognize the increased needs and thus put more resources and product lines into the production of the relevant products and as a result people who have the needs would be soon content to buy their desired clothes in a more reasonable price.

 

1.1.3            Disadvantages market economy

 

1.1.3.1      Inequalities of income distribution

 

Based on the view of Steven C. Hackett and Michal C. Moore (2011, p.51) the efficiency and effective price mechanism of well-functioning market economy have nothing to say about the underlying fairness with which resources, wealth, and income are distributed in society. Such a market efficiently allocates resources and maximizes total surplus but would not equitably distribute resources in a society with substantial income inequality. Some economists argue that this sort of inequality is also a form of market of market failures because if the necessities of life are allocated by the way of the market systems, then those who lack the ability to pay may not be able to meet their most basic needs, leading to inequalities of income distribution.

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