Characteristics of a Market Economy and Reasons for Government Intervention

Outline the characteristics of a market economy and the reasons for government intervention

A market economy is an economy in which decisions regarding investment, production, and distribution are based on the supply and demand of consumers, and prices of goods and services which are determined in a free price system. The six major defining characteristics of a market economy is that the economy is ruled by the people/consumers and not by the government and it is up to the people to choose what is to be produced in order to satisfy their needs and wants.
One of the characteristics of a market economy includes the allowance of private ownership of property through existing private property rights by any individual. This allows individuals to make legally binding contracts to lease, rent and sell their property as well as giving them the right to profit from ownership.
The second characteristic is that market economies give individuals the freedom of being able to establish their own business as well as own and run it in accordance to them. Freedom of choice is also allowed in what individuals choose to spend their money on and make their own decisions.
The exercise of consumer sovereignty (for goods and services) is another distinct characteristic, where individuals are referred to as ‘king’ in the market place, as they make their own decisions on what they spend their money on. They are also the major influence in what is to be produced and sold in factor markets.
The fourth characteristic is the motivation of individual behaviour through methods of self interest as well as the profit motive in running and/or establishing a business. Although these motives can be selfish, it works as a benefit for the economy in the long run, as this auction system prices all goods and services fairly, accurately depicting true supply and demand.
Another characteristic in market economies is competition, the competitive pressure that keeps prices moderate and ensures...