Free Market Economy. A free market economy is an economic system which resolves the basic economic problem through the price mechanism.
A free market economy has the following characteristics:
- Main Agents. The main agents include consumers, producers, owners of private property and the government.
- Private Ownership. Most of the factors of production (land and capital) are owned by private agents. The government must enforce property rights to protect private agents’ property.
- Motivation. Motivation in a free market system is pure self-interest. Consumers maximize their own welfare, firms maximize their profits, private individuals maximize their own returns (wages, rents, interest and profit) and the government maximize social welfare.
- Free Enterprise. Firms can sell basically anything they want to sell, consumers can buy nearly anything they wish to buy and people can work for whoever they choose to.
- Competition. Basically all markets are competitive because there are many buyers and sellers. Buyers compete with each other to buy goods and firms compete with each other to sell goods.
- Decentralized Decision Making. Agents are free to choose what they want to do, so decision making is decentralized, that is, the government do not allocate resources.