WEEK 4: READING

What Is a Free Market Economy?

by Mike Moffatt
Updated May 06, 2019

At its most basic, a free market economy is one that is governed strictly by the forces of supply
and demand with no governmental influence. In practice, however, nearly all legal market
economies must contend with some form of regulation.

Definition
Economists describe a market economy as one where goods and services are exchanged at will
and by mutual agreement. Buying vegetables for a set price from a grower at a farm stand is one
example of economic exchange. Paying someone an hourly wage to run errands for you is
another example of an exchange.

A pure market economy has no barriers to economic exchange: you can sell anything to anyone
else for any price. In reality, this form of economics is rare. Sales taxes, tariffs on imports and
exports, and legal prohibitions—such as the age restriction on liquor consumption—are all
impediments to a truly free market exchange.

In general, capitalist economies, which most democracies like the United States adhere to, are
the freest because ownership is in the hands of individuals rather than the state. Socialist
economies, where the government may own some but not all the means of production (such as
the nation's freight and passenger rail lines), can also be considered market economies as long as
market consumption is not heavily regulated. Communist governments, which control the means
of production, are not considered market economies because the government dictates supply and
demand.

Characteristics
A market economy has several key qualities.
Private ownership of resources. Individuals, not the government, own or control the means
of production, distribution, and exchange of goods, as well as the labor supply.
 Thriving financial markets. Commerce requires capital. Financial institutions such as banks
and brokerages exist in order to supply individuals with the means to acquire goods and
services. These markets profit by charging interest or fees on transactions.
Freedom to participate. Production and consumption of goods and services is voluntary.
Individuals are free to acquire, consume, or produce as much or as little as their own needs
require.

Pros and Cons

There's a reason why most of the world's most advanced nations adhere to a market-based
economy. Despite their many flaws, these markets function better than other economic models.
Here are some characteristic advantages and drawbacks:

Competition leads to innovation. As producers work to satisfy consumer demand, they also
look for ways to gain an advantage over their competitors. This can occur by making the
production process more efficient, such as robots on an assembly line that relieve workers of the
most monotonous or dangerous tasks. It can also occur when a new technical innovation leads to
new markets, much as when the television radically transformed how people consumed
entertainment.
Profit is encouraged. Companies that excel in a sector will profit as their share of the market
expands. Some of those profits benefit individuals or investors, while other capital is channeled
back into the business to seed future growth. As markets expand, producers, consumers, and
workers all benefit.
Bigger is often better. In economies of scale, large companies with easy access to large pools
of capital and labor often enjoy an advantage over small producers that don't have the resources
to compete. This condition can result in a producer driving rivals out of business by
undercutting them on price or by controlling the supply of scarce resources, resulting in a
market monopoly.

There are no guarantees. Unless a government chooses to intervene through market

regulations or social welfare programs, its citizens have no promise of financial success in a
market economy. Such pure laissez-faire economics is uncommon, though the degree of political
and public support for such governmental intervention varies from nation to nation.

Sources
Amadeo, Kimberly. "Market Economy, Its Characteristics, Pros, Cons With Examples."
TheBalance.com, 27 March 2018.
Investopedia staff. "Free Market: What Is a 'Free Market'?" Investopedia.com.
Rothbard, Murray M. "Free Market: The Concise Encyclopedia of Economics." EconLib.org,
2008.

https://www.thoughtco.com/free-market-economy-definition-1146100 accessed August 8, 2019

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Exercises:
A1. Match the definitions on the right to the words on the left.
No. 1 has been done as an example

1 governed a short journey undertaken in order to deliver or collect

something, often on someone else's behalf.
2 contend (of an event, situation, or condition) not occurring very often.
3 at will a train of freight cars.
4 errand(s) buy or obtain (an object or asset) for oneself.
5 barrier(s) believe in and follow the practices of.
6 rare 1 conducted the policy, actions, and affairs of (a state,
organization, or people).
7 impediment(s) a method or way of doing something
8 adhere the business or service of acting as a broker (a person who
buys and sells goods or assets for others).
9 means at whatever time or in whatever way one pleases.
10 freight demanding (an amount) as a price from someone for a service
rendered or goods supplied.
11 brokerage(s) something immaterial that impedes or separates; obstacle
12 acquire a hindrance or obstruction in doing something.
13 charging struggle to surmount (a difficulty or danger).

A2. Match the definitions on the right to the words on the left.

1 flaw(s) gave support, confidence, or hope to (someone).

2 drawback(s) furnish with something that grows or stimulates growth or
development
3 relieve become or make larger or more extensive.
4 transformed (especially of food, money, or some other resource)
insufficient for the demand.
5 encouraged directed toward a particular end or object.
6 excel come between so as to prevent or alter a result or course of
events.
7 expand(s) release (someone) from duty by taking their place.
8 channeled a policy or attitude of letting things take their own course,
without interfering.
9 seed offering goods or services at a lower price than (a
competitor).
10 undercutting made a thorough or dramatic change in the form, appearance,
or character of.
11 scarce a mark, fault, or other imperfection that mars a substance or
object.
12 intervene extremely good; outstanding.
13 laissez-faire a feature that renders something less acceptable; a
 disadvantage or problem.

B. Answer the following questions based on the above text:

1. What is a free market economy?

2. What are the examples of economic exchange?
3. What prevent a truly free market exchange?
4. Why is capitalist economy the freest?
5. What are Socialist economies?
6. Why are not Communist governments considered market economies?
7. What is meant by private ownership of resources?
8. What is the role of banks and brokerages?
9. Why is a market-based economy preferred?
10. What is meant by competition leads to innovation?
11. Where does profit go to?
12. Why is it said that bigger is often better?
13. What is the purpose of government’s intervention?

r.a. 2019