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Market economy
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Market economy

A market economy is an economy in which most allocations of resources occur as a result of interactions between buyers and sellers of goods and services. It is often contrasted with a planned economy in which most allocations of resources occur as a result of planning by a central agency.

Although market economies are often identified with capitalism, it could be argued that the connection need not be very strong. It is possible for a market economy to have government intervention in the economy. The key difference between market economies and planned economies lies not with the degree of government influence but with how that influence is used. In a market economy, if the government wants more steel, it collects taxes and then buys the steel at market prices. In a planned economy, a government which wants more steel simply orders it to be produced.

The proper role for government in a market economy remains controversial. Most supporters of a market economy believe that government has a legitimate role in defining and enforcing the basic rules of the market. More controversial is the question of how strong a role the government should have in both guiding the economy and addressing the inequalities the market produces. Examples of controversial economic policies include protectionist tariffs, federal control of interest rates, and welfare programs.

In the 1980s, most of the planned economies in the world attempted to transform themselves into market economies. In the Soviet Union, this process was known as perestroika while in China the creation of a socialist market economy was one element of Chinese economic reform.

See also