Final answer:
A system of allocation based on the free market exchange denotes a capitalist or free-market economy, where the price system determined by supply and demand regulates the distribution of goods and services, with minimal government intervention.
Step-by-step explanation:
A system of allocation that is generally based on the free market exchange of goods and services is typically referred to as a capitalist or free-market economy. In this economic framework, goods and services are distributed according to supply and demand in the marketplace, with minimal government intervention. Prices are determined through the price system, which is driven by competition among buyers and sellers. Buyers seek to acquire goods and services by offering higher prices, while sellers compete by providing lower prices or higher quality goods and services. Through this process, the market efficiently allocates resources and informs participants about the relative scarcities of goods and services.
This economic model is rooted in classic economic theories and has been a fundamental aspect of the American economic policy. The belief is that individuals should have the freedom to make and buy what they want, creating a diverse market full of choices. The 'invisible hand' of the market, a concept introduced by Adam Smith, is expected to guide efficient and fair exchanges, benefiting both producers and consumers. However, the system also acknowledges that not everyone will have equal access to wealth and income, thus affecting their buying power.
Despite the general trend towards free-market principles, many economies, including that of the United States, incorporate a degree of government regulation to address market failures and provide public goods and services. Overall, capitalism is characterized by private ownership, the pursuit of profit, and a strong emphasis on individual liberty and choice in economic affairs, balanced against some level of government oversight.