Free Market Definition & Impact on the Economy

What Is a Free Market?

A free market is one where voluntary exchange and the laws of supply and demand constitute the sole basis for the economic system, without government intervention. A key feature of free markets is the absence of forced transactions or conditions on transactions.

When most people discuss the “free market,” they mean an economy with competition and only private transactions between buyers and sellers.

The Free Market's Connection With Capitalism and Individual Liberty

No pure free market economies actually exist. All markets are in some ways constrained. Most free market economies are in countries that value private property rights, capitalism, and individual rights. Capitalists have an incentive to pursue profits. There is generally a positive relationship between free markets and measures of economic well being.

Common Constraints on the Free Market

Common examples of constraints on the free market include: prohibition of specific exchanges, taxation, regulations, licensing requirements, fixed exchange rates, and employee hiring practices. These constraints on free markets protect consumer safety, fairness between social groups, and the provision of public goods.

Measuring Economic Freedom

Economists have developed several indexes of economic freedom, including the security of property rights, the burden of regulation, and openness of financial markets.

Source: Free Market Definition & Impact on the Economy
© Dotdash Meredith

Back to top