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A market economy is an economic system in which the decisions regarding investment, production, and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.[1][2]
Market economies range from minimally regulated free market and laissez-faire systems where state activity is restricted to providing public goods and services and safeguarding private ownership,[3] to interventionist forms where the government plays an active role in correcting market failures and promoting social welfare. State-directed or dirigist economies are those where the state plays a directive role in guiding the overall development of the market through industrial policies or indicative planning—which guides yet does not substitute the market for economic planning—a form sometimes referred to as a mixed economy.[4][5]
Market economies are contrasted with planned economies where investment and production decisions are embodied in an integrated economy-wide economic plan. In a centrally planned economy, economic planning is the principal allocation mechanism between firms rather than markets, with the economy's means of production being owned and operated by a single organizational body.
- ^ Gregory and Stuart, Paul & Robert (2004). Comparing Economic Systems in the Twenty-First Century (7th ed.). George Hoffman. p. 538. ISBN 0618261818.
Market Economy: Economy in which fundamentals of supply and demand provide signals regarding resource utilization.
- ^ Altvater, E. (1993). The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. Verso. p. 57.
- ^ Yu-Shan Wu (1995). Comparative Economic Transformations: Mainland China, Hungary, the Soviet Union, and Taiwan. Stanford University Press. p. 8.
In laissez-faire capitalism, the state restricts itself to providing public goods and services that the economy cannot generate by itself and to safeguarding private ownership and the smooth operation of the self-regulating market.
- ^ Altvater, E. (1993). The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. Verso. pp. 237–238.
- ^ Tucker, Irvin B. p 491. Macroeconomics for Today. West Publishing. p. 491