A market economy is an economic system in which the decisions regarding investments, production, and distribution are guided by the price signals created by the forces of supply and demand. It ranges from minimal regulated free markets to laissez-faire systems.
There is freedom of choice in the market economy, private property, and motivation of self-interest, competition, and limited government.
Pros of Market Economy
- It ensures that the most desirable goods are produced
As the market economy allows free interplay of supply and demands it ensures that there is a supply of most desirable goods hence the consumers will be able to have a continuous supply of goods in the market.
- Efficient production of goods and services
The most productive companies will earn well from the production as they will be able to produce goods and offer services efficiently. The less productive companies will not be able to earn well as they will not be able to produce goods efficiently.
- Encourages innovation
There will be more innovations as the companies will be striving to produce goods of high quality so that they may fetch a wide market. The consumers will go for goods that are of high quality hence high sales on those products.
- There will be competition
Businesses will be able to compete against each other and this will make them produce goods that are of high quality hence the consumers will be able to enjoy high-quality goods.
- It offers variety to the consumers
As there will be innovations there will be a production of new products in the market and this will allow consumers to have a variety of goods to choose from.
- It motivates the producers
The producers will be able to produce goods of high quality as they will be motivated by the competition in the market and this will enable them to make high sales.
- There will be a continuous supply of goods
The producers will supply goods continuously and this will make the prices stabilize as there will be no rise in supply and demand during specific times.
- It creates employment opportunities
There will be the availability of employment opportunities as many companies will need people to work in the companies hence creating many chances of employment opportunities to the surrounding population.
Cons of Market Economy
- It may lead to an imbalanced economy
If there is no regulation in the market, the government will raise the prices of the commodities and this may make the small companies suffer as they will not be able to make enough profit like the big companies from the prices the government will set.
- Workers’ welfare will not be put into consideration
With the company producing goods continuously will make the welfare of the workers not to be put into consideration as they will be required to be on the job every day to facilitate continuous production.
- It may lead to inferior products
As the companies will be producing goods continuously, they may produce goods of low quality as they will be competing with other companies in the market.
- Environmental degradation
As the companies will be producing goods continuously, there will be a lot of waste being released in the environment hence the environment will be degraded.
- High prices of the commodities
The companies may use all the available raw materials and this may lead to the importation of the raw materials that will eventually make the companies raise the price of the commodities in the market.
- It favors those who start the business with large capital
The companies that start the business with large capital will be able to cope up with the market prices as they will be able to maintain the production of the goods.
There is a debate still going on whether the market economy is better than the command economy. There is no perfect economic system and this makes both the systems have advantages and disadvantages. Freedom with no limitation may create more harm than good and this may render market economy not that good for a country to adopt.