What is a Voluntary Exchange?

Definition: A voluntary exchange is a transaction where parties trade goods or services freely, with no coercive or restrictive force involved. In other words, both parties are willing and able to exchange items as they wish.

What Does Voluntary Exchange Mean?

The concept of voluntary exchange is particularly important in free market economies. Classical and neoclassical economic schools agree that any modern market economy must assure its players a voluntary exchange environment. This concept means that anyone with the desire to buy or sell something can make a free and independent choice to do it if there is a market for it.

It is assumed that the government doesn’t restrict the free flow of merchandise, actually the opposite takes place, since government agencies are designed to promote voluntary exchange in order to increase economic activity and growth. All parties are moved by an utility-based approach where everyone pursues its self-interest and modern economic theory also states that trade decisions are based on rationality. Other economic systems such as communism or socialism don’t allow voluntary exchange in all its extent, since the government frequently regulates a big portion of the economy for supposedly strategic purposes.

Example

Kirk is a 37 year old engineer living in Palo Alto. He currently owns a big pent house there and he has been thinking about selling it to get a house in the suburbs. According to his realtor there’s a small market for properties like his, since high-profile clients normally buy in new buildings, so in order to sell the property quickly he has to offer either an attractive price or be willing to wait a while until the right buyer shows up.

Since the United States is a market economy, Kirk can sell his house freely and other people can also buy it if they want to, but they can choose not to. This is the part where the word voluntary comes into play, since both parties can be willing either to say yes, or to decline the transaction, without the government being able to step in and force them to do anything.