In a pure market economy, producers and consumers have the freedom to make their own economic decisions, without those decisions being guided or dictated by a central controlling mechanism. Ideally, this freedom enables buyers and sellers to make rational economic decisions, and the prices of products and services may be set by supply and demand. The economy also requires competition, so firms may enter or leave an industry in response to the pricing and potential for profits, enabling more efficient firms to survive and less efficient firms to leave the market. It requires that firms and consumers have private ownership of their assets without any participation in the market by the government or government-owned entities and also requires no government intervention in the form of subsidies or regulation that may influence the consumers in their choice of product.
The factors of production — such as land, capital and labor — are sold by the people to firms in this type of economy. There is no participation by the government in this because the government does not own any of the factors of production. There is a pure market for labor, without government regulation on wages or intervention in bargaining between workers and firms over the price of their labor. The capital and land are all privately owned, so rents and interest rates are set by the pricing mechanism of supply and demand without government regulation.
The market for goods and services consists of consumers paying firms for their products, making rational economic decisions to buy the best products, and thereby ensuring that the most efficient firms make the most profit for their products. A pure market economy requires a system of money that enables prices to be set by supply and demand and to move freely up and down, avoiding the inefficiency of a bartering system. The pricing mechanism ensures that the factors of production are used in the most effective way and that there is an efficient allocation of resources within the economy. The market is competitive because there are a large number of buyers and sellers, and no firm is in a monopoly position from which it could set prices outside the normal market mechanism. Neither is there any chance of an oligopoly in which a few firms might collude to set prices between them to keep the prices artificially high.
