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Market economy

A market economy is an economy in which most allocations of resources occur as a result of interactions between buyers and sellers of goods and services. It is often contrasted with a communist economy in which most allocations of resources occur as a result of commands issued by a central agency.

Although market economies are often identified with capitalism, the connection need not be very strong. It is possible for a market economy to have large amounts of government intervention and ownership of the economy. The key difference between market economies and command economies lies not with the amount of government influence but with how that influence is used. In a market economy, if the government wants more steel, it collects taxes and then buys the steel at market prices. In a command economy, a government which wants more steel simply orders it to be produced.

The proper role for government in a market economy remains controversial. Most (although not all) supporters of a market economy believe that government has a legitimate role in defining and enforcing the basic rules of the market. More controversial is the question of whether and to what degree governments should attempt to address questions of social inequality produced by a market economy.

In the 1980's, most of the command economies in the world attempted to transform themselves into market economies. In the Soviet Union, this process was known as perestroika while in China the creation of a socialist market economy was one element of Chinese economic reform.

See also: Free market, Minarchism, Mixed economy, Neo-liberalism, Gift economy, Financial markets



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