market economy

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An economy in which a substantial proportion of goods are allocated by the use of markets. This is contrasted with a planned economy, in which most goods are allocated by a centralized decision-making authority. The advantage of a market economy is that prices fixed by markets convey information about the relative demand for various goods and services and the relative costs of providing them. The prices also provide incentives to increase profitable and decrease unprofitable activities. In the absence of market failure the equilibrium of a market economy is Pareto efficient. In practice most economies are based on varying mixtures of markets and government planning.

Subjects: Economics.

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