background – Market Economy
Market economy is better referred to as FREE market economy since this clarifies the relationship with democracy and relative freedom from state direction. In any event it is driven by individual and private rather than state activity in those areas involving not only manufactured products but also services, the workforce and indeed capital. Free Market economy might be referred to as an economic system, or a process or as an identified practice but it is NOT an ideology as such. Nevertheless, the development of market economies tend to reflect change in the social and political nature of a nation.
In a free market economy, consumers and producers determine what and how much is made and what it costs, responding of course to supply and demand. The individual gains but contributes to the gains of others and where imbalances arise, the system should be self-correcting though sometimes are not e.g. house prices, mortgage and bank rates. Conversely, the balance may be altered with purpose, classically through e.g. advertising flat screen TV in order to create demand, increase mass production etc.
Local (national) legislation impacts on a free market economy, in most situations with ready agreement by business especially if it is seen to be independent and protective e.g. the Competition (formerly Monopolies and Mergers) Commission, though technically this is not required for it to function. The differences between the impacts of legislation in different countries can be seen in the annually published “Index of Economic Freedom.”
Central (government) external impact also bears on the free market economy through subsidies and taxes and in this sense can steer both consumer and producer. An impact on those outside the consumer-producer group is called an “externality” e.g. the impact of chemical industry pollution on pedestrians in Widnes and can be negative (undesirable or harmful) or positive (beneficial). Stern identifies externality in his review.
Externalities are seen by some as an important weakness in the free market model, equally some see them as an area where government should intervene. Clearly the Stern Review cites market failure and promotes intervention.
What is a Market Economy?
Law of supply & demand
Index of Economic Freedom
Externality (glossaries link)