Free Market System

Free Market System

What is a Free Market System?

Definition

In a free market system, the forces of supply and demand determine prices. There is no central authority that directs the economy. Instead, businesses function in an independent fashion. There is little or no regulatory control.

What does free market system mean?

In a free market, individuals make economic decisions. Resources are allocated on the basis of the demand that exists for them. The prime motivation for producers of goods is the profit that they will make. Another important characteristic of a free market system, or a laissez-faire economy as it is also known, is the high level of competition in the market. If manufacturing a certain product or providing a particular service yields high profits, it will attract new entrants to the respective businesses. Consequently, production will increase and prices will be driven downwards. This provides a great benefit to customers. However, it is important to remember that a truly free market exists only in theory. Every country’s government imposes some degree of restriction on the freedom with which individuals can operate. For example, there may be a minimum wage that a business needs to pay its workers. Similarly, an entrepreneur would need various types of permissions and approvals from different authorities for setting up a factory. The opposite of a free market economy is a command economy. Here, all economic decisions are centralized and individuals have little freedom to operate independently. In reality, most countries follow a system that is a mix of a free market economy and a command economy.

Example of free market system

The United States is a good example of a free market. It is the largest economy in the world by far and much of its success is due to the freedom that its citizens enjoy in making economic decisions. But there are other countries that rank ahead of the US in terms of economic freedom. According to The Heritage Foundation, a think tank based in Washington, D.C., businesses in Hong Kong enjoy the greatest degree of economic freedom. Hong Kong, which is part of China, has extremely low taxes and a minimal level of government regulation. Singapore ranks at #2, while New Zealand is at the third position. The Heritage Foundation’s 2018 Index of Economic Freedom places the US at #18.

Summary

In a free market economy, individuals can buy and sell goods freely with a minimum of government regulation and interference. Market forces determine prices and businesses are motivated primarily by the profit motive.