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A market economy is an economic system in which economic decisions and the pricing of goods
and services are guided solely by the total interactions of a country's individual citizens and
businesses. There is little government involvement or central planning. This is the opposite of a
centrally planned economy, in which government decisions drive most feature of a country's
economic activity.
Market Theory
Market economies work on the assumption that forces such as supply and demand are the best
determinants of aggregate wellbeing. Strict adherents to the theory rarely engage in government
interventions such as price fixing, license quotas and industry subsidies. Theoretical proponents
argue that central planners could not possibly gather and analyze enough information to make the
optimal economic decision for all participants. Instead, each rational person with perfect
information and free will should be able to maximize his well being given the set of options with
which he is presented. Moreover, this allows individuals to attach different amounts of value to
leisure, wealth, goods or future consumption. The personal economic value of these different
aspects is known as utility. Detractors assert that the conditions that allow markets to function
properly cannot hold in the real world. They contend that information is not perfect and
universal; many people do not behave rationally; and corruption and uninhibited power can
allow certain actors to exercise undue influence at the expense of others.
they blend free markets with some government interference. However, they are often said to
have market economies because they allow market forces to drive the vast majority of activities,
typically engaging in government intervention only to the extent it is needed to provide stability.
Although the market economy is clearly the popular system of choice, there is significant debate
regarding the amount of government intervention considered optimal for efficient economic
operations. Nations such as Cuba, China and North Korea have been heavily influenced by the
Communist theories under Marxism-Leninism, which promote coordinated economic activity
and centralized planning to achieve egalitarian and shared outcomes. Such economies have
struggled at times due to corruption, inept leadership, limitations to the application of these
theories and trade sanctions from capitalist nations.
A mixed economic system is an economic system that features characteristics of both capitalism
and socialism. A mixed economic system protects private property and allows a level of
economic freedom in the use of capital, but also allows for governments to interfere in economic
activities in order to achieve social aims. According to neoclassical theory, mixed economies are
less efficient than pure free markets, but proponents of government interventions argue that the
base conditions such as equal information and rational market participants cannot be achieved in
practical application.
!--break--Most modern economies feature a synthesis of two or more economic systems, with
economies falling at some point along a continuum. The public sector works alongside the
private sector, but may compete for the same limited resources. Mixed economic systems do not
block the private sector from profit-seeking, but do monitor profit levels and may nationalize
companies that are deemed impediments to the public good. The United States is mostly a free
market economy, but it incorporates elements such as protection for agriculture and
manufacturing by through trade restrictions and subsidies. This makes the United States a mixed
economy by definition.