Assessment of the market economy system

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Title: The market system is the best method of resource allocation. Governments should limit themselves to the protection of private property rights. Discuss

When people talk about free market economy, we usually associate it with capitalist economy system, which was an unacceptable form from Chinese viewpoint in the old days. However, in the modern world, market economy does play an important role in regulating actions in the trading market and many countries are running under the market economy system as well. In my opinion, market economy is the best method of resource allocation up to now, and it should be put into the dominant and decisive place in the economic system, government intervention mixed at the same time.

As economy is concerned with allocating the scarce resources to satisfy human beings' unlimited wants, the central problem is focused on problem of scarcity. So any economy system, whatever command economy or market economy, must be able to allocate resource as efficiently as possible. However, market economy, has an absolute advantage in both productive and allocative efficiency, compared with the former, because people can make rational choices according to the interaction of demand and supply which will have an impact on the price of the goods and services.

Free market economy is also known as "Laissez-Faire" economy, which means government will not give people assignment to accomplish and all the decisions made are based upon pure self-interests, which is the most efficient incentive for individuals. The incentive is the "invisible hand" of the market, as Adam Smith described. He argued, "Although economic actors pursued their own self interest, the result would be an allocation of resources in the economy which would be in the interests of society as a whole"(Anderton A. p.720). It turns the "vice" of selfishness into the "virtue" of serving the community.

Privatisation, first of all, is a notable feature in market economy, which is to transfer the assets from the public sector to private sector by deregulation. In this way, the firms has more freedom deciding what to produce, how to produce and to whom to produce according to demand and supply in the market. What is more, the future of a firm is closely associated with individuals because they own the asset of the firm. That is to say, individuals will benefit from the profit they make, and individuals will also damage if they make a loss. So privatisation give the society a competitive atmosphere where individuals will do what they can to make more benefit so that the market get the productive efficiency due to the incentives.
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From the producers' point of view, they try to make more producer surplus (profit). I think there is a simplified mathematic formula representing producer surplus:

Producer surplus = (Price - Cost) * Quantity of Sale

In perfect competitive market, individuals have no power to control the price of the goods and services. So from the formula, be may find out that a producer can only determine the variable "cost". If a producer wants to use the same amount of input to get more output, the only way to think of is to innovate the procedure of ...

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