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What Is a Pure Market Economy?

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  • Written By: Peter Hann
  • Edited By: Angela B.
  • Last Modified Date: 27 November 2016
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In a pure market economy, producers and consumers have the freedom to make their own economic decisions, without those decisions being guided or dictated by a central controlling mechanism. Ideally, this freedom enables buyers and sellers to make rational economic decisions, and the prices of products and services may be set by supply and demand. The economy also requires competition, so firms may enter or leave an industry in response to the pricing and potential for profits, enabling more efficient firms to survive and less efficient firms to leave the market. It requires that firms and consumers have private ownership of their assets without any participation in the market by the government or government-owned entities and also requires no government intervention in the form of subsidies or regulation that may influence the consumers in their choice of product.

The factors of production — such as land, capital and labor — are sold by the people to firms in this type of economy. There is no participation by the government in this because the government does not own any of the factors of production. There is a pure market for labor, without government regulation on wages or intervention in bargaining between workers and firms over the price of their labor. The capital and land are all privately owned, so rents and interest rates are set by the pricing mechanism of supply and demand without government regulation.

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The market for goods and services consists of consumers paying firms for their products, making rational economic decisions to buy the best products, and thereby ensuring that the most efficient firms make the most profit for their products. A pure market economy requires a system of money that enables prices to be set by supply and demand and to move freely up and down, avoiding the inefficiency of a bartering system. The pricing mechanism ensures that the factors of production are used in the most effective way and that there is an efficient allocation of resources within the economy. The market is competitive because there are a large number of buyers and sellers, and no firm is in a monopoly position from which it could set prices outside the normal market mechanism. Neither is there any chance of an oligopoly in which a few firms might collude to set prices between them to keep the prices artificially high.

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anon991353
Post 5

Why does a pure market economy not work?

anon355289
Post 4

A pure market economy is not just a market economy without government interference.

A pure market economy is a market economy where non of the participants have any individual power over the price, where all products are identical and all participants know the quality and the price of the product. In a pure market economy, all costs have been priced in and as soon as a producer or consumer disappears from the market they will be replaced.

In short, a pure market does not exist and can only serve as a benchmark to compare other markets against.

When it comes down to the role of the government, many see it as a government role to correct the market where any

of assumptions for a pure market are not being met to a significant extent in such a way that general prosperity is reduced. To some extent this could be considered a technical discussion.

In addition to these pure market failures, there is a view among many that the outcomes of the market are not fair even when it functions reasonably well and therefore requires governmental interference. This is a political discussion.

bear78
Post 3

There isn't a single country with a pure market economy. As far as I know, all Western countries have a free market economy with some regulation.

Some countries, especially the old Soviet countries have much more regulation and are even further away from a pure market economy.

I think we can say that a pure market economy is a eutopia.

donasmrs
Post 2

@ankara-- No. We're a market economy, but not a pure one. US government uses subsidies and similar interventions often, especially when the economy isn't doing too well.

A pure market economy can be very cruel for businesses because competition and rationality directs everything. If a business fails, then it fails. The stronger industries and businesses rule.

This is not easy to do though. Because a lot of investment is made in these industries and their failure has a lot of social repercussions such as loss of jobs.

This is why the government often regulates the economy by giving subsidies to businesses and industries who need help to prevent bankruptcy. We are not a pure market economy for this reason.

bluedolphin
Post 1

Is the US a pure market economy?

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