A:

There are many different definitions of a market economy, some of which allow for government intervention. In a laissez faire free market economy, the government plays no role in economic decision-making. Many would consider the United States to be a market economy, despite its heavy levels of government control and regulation.

In a certain sense, a government can intervene in a market economy up to the point that it is no longer considered a market economy. Elements of capitalism still exist as long as private individuals are allowed to own property and profit from its use.

Types of Economic Systems

Economic systems are divided into three broad categories: free market, mixed and command. The determining factor comes down to who owns and controls property and the factors of production. In a free market economy, private individuals or groups are in control. The government is in control in a command economy. Mixed economies have elements of both. Most economies in the world today are mixed, though some are command.

An example of a command economy would be communist North Korea. The North Korean government owns and controls all property, production decisions and allocation of resources. The old Soviet Union was also a command economy. These cannot be considered market economies.

The purest free-market economy would conceivably lack a monopolistic government and coercive taxation. Historical evidence struggles to come up with concrete examples of a government-less free market systems. The closest well-documented examples in modern history would be Hong Kong in the 1950s and the U.S. during the 19th century (excluding the Civil War period).

Clearly, even the most free market economies by historical standards have some level of government influence. Some libertarian and free-market proponents, known as minarchists, suggest that a true market economy would only have three government functions: courts, police and military.

RELATED FAQS
  1. What is the difference between a command economy and a mixed economy?

    Learn about command and mixed economies, how the two economic systems function, and the main difference between a command ... Read Answer >>
  2. What's the Difference Between a Market Economy and a Command Economy?

    Set by supply and demand, a market economy operates through a price system; in a command economy, governments control the ... Read Answer >>
  3. What are the advantages and disadvantages of a command economy?

    Learn about the basic tenets of a command economy and what its inherent advantages and disadvantages are versus a free market ... Read Answer >>
  4. What are some common features of a mixed economic system?

    Look at a brief overview of the defining features of mixed economies and its perceived advantages and disadvantages Read Answer >>
  5. What is the difference between a command economy and a shadow economy?

    Learn about command and shadow economies, how the two economies function and the main difference between the two. Read Answer >>
  6. What are some examples of free market economies?

    Hong Kong, Singapore and Australia are examples of free market economies. Read Answer >>
Related Articles
  1. Investing

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
  2. Investing

    Which Countries Will Drive Global Growth in 2016?

    Given the volatility that has already shaken the global economy, the world's largest economies will be leaned on to stimulate growth in 2016
  3. Insights

    Free Markets: What's The Cost?

    Some argue that when the free market fails to protect consumers, government regulation is required.
  4. Personal Finance

    Market Economy

    In a market economy, economic decisions and prices are determined by market forces rather than by central planning.
  5. Insights

    Socialist Economies: How China, Cuba And North Korea Work

    What is socialist economics in the context of Cuba, China and North Korea?
  6. Insights

    The Long View on China's Recent Stock Meltdown

    China's bull market was fueled by a widespread belief that the government’s economic reforms were a success and a sign that President Xi Jinping’s dream of a prosperous China was becoming a reality. ...
  7. Investing

    Risk and Reward In Emerging Market Economies

    An emerging market economy is one that’s progressing into an advanced economy.
  8. Investing

    Will China Suffer a Fate Similar to That of the Soviet Union?

    Many parallels could be drawn between the former USSR and today's China, but the one similarity the CCP wants to avoid is the Soviet Union's collapse.
  9. Investing

    Moral Hazard in the Chinese Market

    The Chinese government faces the issue of balancing its desire to maintain stable markets through manipulation with the danger of a looming bubble if stock prices run up too much.
RELATED TERMS
  1. Command Economy

    A system where the government, rather than the free market, determines ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism ...
  3. New Economy

    New economy is a buzzword describing new, high-growth industries ...
  4. Sluggish Economy

    A state in the economy in which the growth is slow, flat or declining. ...
  5. Closed Economy

    An economy in which no activity is conducted with outside economies. ...
  6. Steady State Economy

    An economy structured to balance growth with environmental integrity. ...
Hot Definitions
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
  6. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability of potential investments.
Trading Center