<P> Market socialism is a form of market economy where the means of production are socially - owned . In a market socialist economy, firms operate according to the rules of supply and demand and operate to maximize profit; the principal difference between market socialism and capitalism being that the profits accrue to society as a whole as opposed to private owners . </P> <P> The distinguishing feature between non-market socialism and market socialism is the existence of a market for factors of production and the criteria of profitability for enterprises . Profits derived from publicly owned enterprises can variously be used to reinvest in further production, to directly finance government and social services, or be distributed to the public at large through a social dividend or basic income system . </P> <P> Market socialism traces its roots to classical economics and the works of Adam Smith, the Ricardian socialists, and Mutualist philosophers . </P> <P> In the 1930s the economists Oskar Lange and Abba Lerner developed a model of socialism that posited that a public body (dubbed the "Central Planning Board") could set prices through a trial - and - error approach until they equaled the marginal cost of production in order to achieve perfect competition and pareto optimality . In this model of socialism, firms would be state - owned and managed by their employees, and the profits would be disbursed among the population in a social dividend . This model came to be referred to as "market socialism" because it involved the use of money, a price system, and simulated capital markets; all of which were absent from traditional of non-market socialism . </P>

Prices in a market economy are based on