6 Characteristics of a MARKET ECONOMY

COMPETITION

Economic rivalry means that buyers and sellers are free to enter or leave any market and that there are buyers and sellers acting independently in the marketplace. It is competition, not government regulation, that diffuses economic power and limits the potential abuse of that power by one economic unit against another as each attempts to further its own self-interest.

SYSTEM OF MARKETS AND PRICES

Financial Systems

Maintaining Legal and Social Framework

Government creates laws, provides a court system, establishes a monetary (money) system, defines and enforces property rights-"they try to make things fair."

PRIVATE PROPERTY

Labor resources, natural resources, capital resources (e.g., equipment and the goods and services produced in the economy are largely owned by private individuals and private institutions rather owned by the government. This private ownership combined with the freedom to negotiate legally binding contracts permits people, within very broad limits, to obtain and use resources as they choose.

Maintaining Competition

The government creates and enforces antitrust laws (limits monopolies) and regulates natural monopolies.

Redistributing Income

The government establishes incomes tax rates, provides for social security, unemployment compensation, medicaid, aid to needy children.

FREEDOM OF ENTERPRISE AND CHOICE

Private entrepreneurs are free to obtain and organize resources in the production of goods and services and to sell them in markets of their choices. Consumers are at liberty to buy that collection of goods and services that best satisfies their economic want. Workers are free to seek jobs for which they are qualified for.

MOTIVE OF SELF-INTEREST

The "invisible hand" that is the driving force in a market economy is each individual promoting his or her self intrest. Consumers aim to get the greatest satisfaction from their budgets; enterpurners try to acheive the highest profits for their firms; workers want the highest possible wages and saleries; and owners of property resources attempt to get the highest posssible prices from the rent and sale of the resources.

LIMITED GOVERNMENT

A competitive market economy promotes the efficient use of its resources. As a self-regulating and self-adjusting economy, no significant economic role for government is necessary. However, a number of limitations and undesirable outcomes associated with the market system result in an active, but limited economic role for government.

Stabilizing the Economy

The government often uses the money supply to stimulate the economy during recessions to grow the economy. The government also may take money out of the circulation to control.

Providing Public Goods and Services

The government provides goods and services that markets are unable or unwilling to provide such as a national defence system, highways, police, fire departments.

Correcting for Externalities=Effects 3rd parties

The government uses taxes or creates laws to reduce reactive externalities (think air pollution, and plastic bags) like pollution or to encourage positive externalities such as better education (No Child Left Behind Legislation.