Final answer:
In a market economy, prices are set by the forces of demand and supply through negotiations between buyers and sellers. The government's role is to create fairness and regulate extreme price fluctuations.
Step-by-step explanation:
In a market economy, prices are set by the forces of demand and supply. This means that buyers and sellers negotiate and agree on prices for goods and services based on what they are willing to pay or accept. This is known as the 'price system' and is determined by market forces. The government does not set prices in a market economy, instead, it plays a role in creating fairness and preventing extreme price fluctuations by imposing regulations such as price ceilings or price floors.