The Role of Government in a Free Market Economy - Essay Example

The Role of Government in a “Free Market Economy” Free markets are evolutionary and encompass economic, social and political organizations. According to Vijay Mathur, a former chairman of the U.S economics department, the most significant pillars of the fiscal growth in a country include self-interest, division of labor and property rights (par 2). Self-interest applies to the needs of both seller and buyer in a free market. This means that the buyer has the right and desire to purchase preferable goods or services at the lowest or affordable prices. The sellers have the freedom to make profits by setting their own positive prices on the goods and services they prefer to sell. The transaction between the buyer and seller fosters cohesion and a free market. Competitive and free economies allow sellers to meet customers’ demands according to their likings and distribute inputs among manufacturers. Division of labor is important in an organization because it facilitates a balance in the economy to reduce the cost of production (Mathur par 2). The government plays a critical role in a free economy by proving a legal framework of enforcing contracts and resolving contractual disputes. The government also protects individual rights to property and establishes a sound economic environment by proving a stable trading currency. The government also provides public goods such as schools, hospitals and street lighting that would be costly for the private sector to provide in a market economy. The government also corrects the market failures such as economic downturns and external costs like air pollution. The government maintains the competition in the free market economy through regulating the activities of monopolies and stabilizes the national economy by regulating the unemployment level, the inflation rate and enhancing the rate of economic growth. The government taxation policies also help in redistributing income in the economy by taxing the rich heavily and using the taxes to provide social services to the low income citizens. A free market elevates the overall economy of a country, but there are unfortunate situations when a free market has dysfunctions. Economists term these circumstances as market failure (Mathur par 3). Market failure occurs due to monopoly power, environmental pollution by manufacturers, common property resources, misinformation and risky business ventures. Market failure prompts the government to intervene by enabling the functioning and fluidity of these small markets. The role of government in free markets is to design, enact and finally implement reasonable market policies and laws that ensure customers and sellers’ rights to buy, sell and own property under positive rates and trading environment. Government requires the cooperation of all free markets to improve the living standards of citizens. Private sectors that continue to improve the overall economy are fully supported by the government and their clients. The government develops institutional and democratic economic structures that guarantee strong and stable economic, political, social and environmental aspects of the country. Regulation of monopolies Monopoly power implies that a single of few manufacturers and sellers control the whole market. The entrepreneurs that control the whole market are referred to as monopolists. They restrict the production of goods and services and charge high rates. Monopolists have the ultimate control of the market thus facilitating the foreclosure of small businesses and gaining the competitive advantage. The government intervenes by creating antitrust laws that split or cease the monopolistic practices (Mathur par 4). Regulating these monopolies promotes the interest of other small-scale business communities and the public. Gas and electric services in the U.S were previously controlled by private sectors. Electricity and gas are essential in running businesses, travelling, cooking, building and construction, medical practices, water and sanitation maintenance and food preservation among others. Monopolists started restricting the output of electricity and gas in the early 90s in major states such as California. The electricity and gas rates increased in price because the electrical companies had gained ultimate control of the competitive market. Correction of market failures A free market allows producers to exercise their freedom and produce any good or service they desire. However, some manufacturers have gone overboard and contributed massively to global warming. Energy production is the biggest contributor to environmental pollution and global warming. An example of producers that did not entirely endure the overall costs of manufacturing their products includes gas and oil companies in Utah (Mathur par 5). These energy producers allowed the waste products from their industries to leak and flow into Uintah basin and Salt Lake valley (Mathur par 5). Most energy producers have medical insurance against such risks, but the companies in Utah failed to manage the energy waste pollution on the population living nearby and failed to prevent further health hazards. The government took charge of the situation by providing healthcare services and imposing strict laws on waste products management. Waste products cannot be disposed in public or privately owned property. Companies that produce energy or other products that have harmful waste products must invest in recycling technologies or hire companies that recycle waste material. Gas and oil companies are the largest revenue contributors in the overall economy, but the government has created laws against the freedom of disposing waste products in natural resources or disposing non-biodegradable waste in wild pieces of land. The free economies are allowed, but they must bear the costs of their products and services. Common Property Resources Common property resources are natural resources that are neither owned by the government nor the private sector (Mathur par 6). These resources are owned by the public, which includes the government, private sectors and the public at large. Common resources in the U.S include Amazon Forest, National Parks, Great Salt Lake and Great Lakes among others (Mathur par 6). These resources are essential in business ventures and social activities. The properties are highly misused because they do not belong to a specific person or organization. Amazon Rainforest has been bombarded with constant tree logging (Mathur par 6). National parks had endangered animals and plant species that were sold in the black market by the public. Oil companies spilled their waste materials in lakes and forests because these resources did not belong to an entity. The government intervened in preserving these natural resources that cannot be privatized. Revenues gained from products and services of these common resources are used in the development of the nation. Risks in Business Ventures Free markets allow private organizations to venture into creative projects such as transmission of electricity through lines, transmission of Internet, water and sanitation system. These business ventures have risks at the initial stages of growth. The government intervenes to help the private sector elevate their product manufacturing or sustain the business (Mathur par 8). Most businesses created by the private sector maximize the welfare of most citizens. Private sectors build houses and commercial centers for people in different states and design an underground water and sanitation system in the densely populated community. The role of government in this business venture is to help in the construction of the underground water and sanitation system. The government also provides security to all citizens living in both public and privately own property. Misinformation in the Real Estate Industry The economic crisis in 2008 started from a bust and boom in the real estate market (Mathur par 7). Real estate owners increased the value of their houses and citizens took first and second mortgages. Financial lending institutions also increased their interest rates that lead to home foreclosures due to borrowers’ inability to pay their loans with interests. This wave of financial crisis affected other economies in the U.S and the global market. Unemployment rate and employee layoffs increased over the few years leading to an economic depression in 2010 in the U.S. This market failure started because of free markets but the government intervened by first changing and reducing the fixed interest rate of loans issued by banks. The state government later adjusted income tax and advised the federal government to fund private companies that employ and sustain hardworking citizens. These measures by the state and federal government display the importance of government in free markets. The government helped to increase employment opportunities, improve the living standards of Americans and sustain economic growth. Conclusion Free markets in the U.S and other economies are essential in products and services production. These products and services are significant in sustaining life, improving education, health and other social importance. However, some problems occur when private sectors engage in harmful practices that affect the public. The government intervenes to stabilize the function of free markets by designing and implementing laws that ensure the safety of all citizens and their properties. This intervention contributes to a stable economic, social and political environment. Work Cited Mather, Vijay. Government’s Role in Free Market Economy. Standard Examiner. 20 Nov 2011. Web. 1 Dec 2012. Read More