A market-based system is an economic system that is controlled by the supply and demand of goods in the market. This type of economic system is not regulated by a central authority such as a state government. However, it is established by voluntary exchange. A lot of countries are undergoing a transitional economy in order to change the ways in which their economies are controlled and managed. They are moving towards market-based systems by removing all the legal restrictions that have prevented private enterprises from operating in most sectors of the economy and limiting international trade. Legal restrictions involve removing price controls, thus allowing prices to be set by the demand and supply in those countries. This also allows private sectors to engage in any type of market without any kind of restrictions, thus allowing them to invest in foreign enterprises as well as international trades.
Transitional economies are also moving towards market-based systems through privatization. Privatization is simply termed as transferring properties into the hands of private individuals. It promotes benefits in economic efficiency as it gives private possessors a compelling motivation. This also promotes an increase in productivity which brings greater profits and ease of entry into new markets and exiting the non-profitable ones. However, a properly functioning market-based system requires laws and regulations protecting them from the legal systems and also provides a mechanism for contract implementation. Moreover, if a legal system protects the private sector, the incentives that they gain will be reduced. For instance, when communism collapsed in eastern Europe, all of the private sectors lacked a way in which they could protect their businesses as the state governments held all the rights.