A market economy is a system of economics which controls the prices of goods and services. Pricing is based on the interactions of businesses and individuals within the society, providing a guide to how much or how little goods or services should be priced. Within a market economy, government intervention or interference is minimal and potentially non-existent. There is no central planning movement.
The primary advantage of a market economy is that competition is the driving force behind the decisions that are made. Supply and demand dictates how goods and services are manufactured or produced. This allows businesses and individuals to seek out goods and services of the highest possible quality for the lowest possible price.
The disadvantage of a market economy is that it places the transactions which occur in a higher regard than the welfare of the individuals in the society. Businesses can find the highest quality worker that will perform duties with the lowest pay in the worst possible working conditions. Instead of creating a race to the top for wages and safety, a market economy creates a race to the bottom.
Here are some additional pros and cons of a market economy to discuss.
What Are the Pros of a Market Economy?
1. It provides a society with the right goods or services at the right time.
Because competition works with supply and demand in a market economy, businesses and individuals receive access to the exact goods or services that they need. Although the quality of these goods may vary based on who manufacturers them, different socioeconomic classes can access specific goods within their price range that they wish to own. This eliminates the ability to have a central authority dictate who should receive access to specific goods and at what price.
2. A market economy promotes entrepreneurship.
Because the emphasis within a market economy is on innovation, it creates an environment where entrepreneurship can thrive. It supports the process of discovering new products or services that will be wanted, while allowing individuals and businesses to decide which products or services will best meet their needs. It is a structure that provides profits for businesses of any size while creating satisfied customers at the same time.
3. It creates competition.
A market economy thrives because businesses are forced to continually innovate to survive. Businesses that refuse to innovate will be left behind because there will always be someone willing to look at things in a different way. This motivation is the foundation of a market economy because it must be there to encourage better products and services to be offered over time.
4. It reduces the need to store products.
Because the laws of supply and demand are enforced in a market economy, manufacturers produce goods based on the demands that the society requires. This reduces the need to store surplus products because anything that is extra will be sold at a deeply discounted price or simply destroyed. The goal is to find a balance between society’s demands and the number of goods that are produced.
5. Market economies tend to provide more jobs.
Small businesses in the US economy represent 99.7% of all businesses. Businesses with fewer than 20 employees in the United States account for 89.6% of the workforce. With a market economy, the focus on innovation allows these small businesses to find a niche and provide local jobs that can pay well. Although larger companies may outsource jobs to save money, local jobs come from individuals and partnerships that exploit a good idea they may have.
6. Prices are usually kept down in a market economy.
Because competition is present within an industry, prices tend to stay lower because businesses are attempting to obtain as many customers as possible. It is this element that is a core philosophy in the Republican health care proposals that circulated in 2017. By introducing competition in the insurance markets across state lines, the goal is to drop policy pricing for many consumers.
What Are the Cons of a Market Economy?
1. Market economies tend to produce inferior goods and services.
The goal of a market economy is to find balance between cost and profit. Businesses will minimize costs and maximize profits. That usually means skilled workers who demand high wages will be replaced by low or average-skill workers who can still produce a reasonably good product, but at a cheaper price. That means a market economy rarely provides the best possible goods and services that could be produced.
2. It harms the environment.
A market economy places an emphasis on the cost of good produced over any other factor. That means there are fewer environmental concerns that are addressed during the production of goods. When it costs less to dump waste in nature than it does to properly dispose of it, the lack of governmental interference or a central authority would allow such an action to occur.
3. Outsourcing is frequent in a market economy.
Because the goal is to produce the highest quality goods at the lowest possible prices, many companies outsource jobs and manufacturing to foreign providers. Outside of the developed world, wages are much lower. Most of humanity lives on less than USD $10 per day. If a local worker needs $10 per hour for their needs and a worker elsewhere will work for $10 per day, outsourcing allows a business to create better profits.
4. Commodity prices typically rise in a market economy.
Commodities are primary agricultural products or raw materials that are bought or sold. Coffee is a commodity, as is copper. In a market economy, these are the items that are essential to the manufacturing process. Without them, a business cannot create goods or services for sale. Because supply and demand applies, and most businesses need commodities to function, the pricing of these goods is higher and that increase gets put into the final consume price tag.
5. Economy imbalances occur frequently within a market economy.
The Great Recession in 2007-2009 occurred because of a lack of regulation in several sectors, including housing, around the world. Similar recessions have occurred throughout history because a market economy eventually creates an imbalance. When more businesses attempt to maximize profits without regard to risk, eventually a negative event occurs and the consumers tend to be the hardest hit by the fallout.
The pros and cons of a market economy show that the forces between businesses and consumers can be beneficial, even if there are minimal controls or regulations in place to dictate that relationship. Although there is a risk for harm to workers and the environment, similar risks exist in other economy forms as well. With the emphasis on innovation and the chance for entrepreneurs to thrive, the positives of a market economy are often seen as outweighing the negatives.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.