Market economy refers to a type of economic system in which the answers to questions regarding what to produce in the economy, how to produce , and how these should be distributed among different groups of people within the society are arrived at purely by the mechanism of free market competition. In this form of organization it is expected that firms and consumers acting to further their own selfish interest will result in best performance for the economy as a whole. However this is a theoretical assumption, which may be justified only under some ideal conditions which never exist in reality.
This model of economic structure of a society represents one extreme end of a continuum of different forms of economies, the other end being command economy, in which decision on answers to key economic questions are determined by government directives. It is now widely recognized by experts that pure forms of both market and command economy are ideal, which are difficult to achieve ion reality. Therefore the most suitable form of economy for any country or a society is a mixed economy, which is somewhere between the two extreme systems.
The biggest limitation of the market economy is that it is based on the assumption of existence of perfect competition. Unfortunately the perfect competition never exists and therefore the the assumed efficiency of market economy is never realized in practice.
Second major disadvantage of market economy is that it assumes capabilities of the people being static. It assumes that market economy results in every person in the economy working at best of his capacity and getting rewarded accordingly. However the capabilities and skills of people are not static, these can be improved under proper conditions and incentives. Market economy provides no mechanism for such improvements, particularly for the development of less fortunate people and improvement of their lot.. As a matter of fact market economy tend to increase the disparities between people.
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