Definition: A free market is an economic system where all agents have freedom to make transactions on their own terms. The term commonly refers to markets where there are no limits imposed by the government to neither competition nor economic decisions.
What Does Free Market Mean?
Free markets are related to capitalist nations because the economic freedom is a key feature of capitalism. Protection to private property and rights are conditions to guarantee a proper performance of free markets. Since market forces ultimately drive decisions, this is the system that guarantees higher efficiency and lower prices. In this regard, quantities and prices are self-regulated by supply and demand.
Nevertheless, no country in the world offers absolute economic freedom. Market imperfections always exists and those cannot be self-controlled by the market. Situations such as information asymmetry, extremely few sellers or buyers and high entry or exit barriers cause the intervention of the government with the aim of regulating damages to certain economic agents. Even in the U.S., which is a country considered to enforce a free market ideology, the government imposes regulations to correct or diminish market imperfections. An extremely regulated market is the opposite of a free market.
Example
John Spade is the father of Carl, a 12 years old boy who asked explanation for the high price of tomatoes at a near supermarket. The boy complained that there were some months when tomatoes were truly cheap but the price more than doubled during the remaining months. John explained that the harvest is abundant in the first period so there were large quantities on sale. The contrary occurs in the second period and tomatoes are not commonly seen.
When the product is widely available price decreases because supply exceeds regular demand. As long as price decreases, housewives increase purchase frequency but tend to shift toward other food products when price rises. John concluded telling his son that supply and demand set the price because the buying and selling of tomatoes is a free market. People are not coerced to buy tomatoes in high-price times and producers are not coerced to lower the price. Everyone makes transactions voluntarily.
