The system relies on private ownership of resources and uses markets and prices to manage economic activities. This system supports private ownership of capital, uses prices to communicate, and coordinates activities through markets, where buyers and sellers meet.
A large number of firms produce products and buy the inputs that are needed to make them. Individual decisions collectively determine the economy’s allocation of resources between competing users and distribution of its output among individual citizens. In a pure market economy, all these decisions, without exception, are made by buyers and sellers acting through unhindered markets.
Goods and services are created and resources are provided by those who are willing and able to do so. This leads to competition among buyers and sellers of each product and resource. As a result, economic decision-making is spread out among many individuals. The possibility of high financial rewards encourages existing companies to innovate and motivates entrepreneurs to develop new products and processes.
In pure capitalism, also known as laissez-faire capitalism, the government has a limited role. Its main job is to protect private property and create a setting where the market can operate. “Laissez-faire” means “let it be,” suggesting that the government should not interfere with the economy. The belief is that such interference disrupts how well the market works.
However, in capitalism, as in the United States and many other countries, the government plays a significant role in the economy. It sets the rules for economic activity, supports stability and growth, provides certain goods and services that would be underproduced otherwise, and changes how income is distributed. Nevertheless, the government does not decide what to produce, how to produce it, or who will receive it. That role belongs to the market.
Previous Questions
Q. Is inclusive growth possible in a market economy? State the significance of financial inclusion in achieving economic growth in India. (150 words, 10 Marks) CSE 2022