A market economy is an economic system in which the forces of supply and demand produce price signals that influence investment, production, and distribution choices. The existence of factor markets, which play a dominating role in the allocation of capital and production inputs, is a key feature of a market economy.
Market economies range from minimally regulated free-market and laissez-faire systems. The government’s role is limited to providing public goods and services while protecting private property rights, to interventionist forms. The government actively intervenes to correct market failures promote social welfare.
State-directed or dirigist economies are those in which the government directs the general growth of the market through industrial policies or suggestive planning (which guides but does not replace the market for economic planning), a type of mixed economy.
Market economies are distinguished from planned economies, in which investment and output choices are enshrined in a comprehensive economic plan that spans the whole economy. Financial planning, rather than markets, is the primary allocation mechanism between companies in a centrally planned economy. The economy’s means of production are controlled and operated by a single organizational entity.
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