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Laissez-Faire Economy - Coursework Example

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Laissez-Faire Economy Name Instructor Task Date Introduction Laissez-faire economy refers to a free market economic system where there is minimal government intervention. Laissez-faire encompasses both the doctrine and policies that actually enforce such an economic system…
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Laissez-Faire Economy
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Download file to see previous pages The resources are allocated by voluntary market transactions with very limited state intervention; the main role of government is to safeguard property rights of individuals. The belief is that both economy and the public would do without governmental involvement that may hamper the economy’s complete potential. However, a purely and effective laissez-faire economy is virtually non-existent; all successful national economies are buttressed by great and effective governments. Laissez-faire economies and liberal market systems lack adequate self-regulation mechanisms and this necessitates the government to intervene to prevent enduring economic crises and numerous social problems associated with pure Laissez-faire economy such as escalating income inequalities. Government’s intervention is also necessary to prevent market failure. Most economic systems are mixed with substantial state intervention, regulation and direction (Baumol & Blinder, 2011). State intervention in an economy is critical to alleviate market failure. Frequently, market failure is an outcome of lack of information concerning the products available in the market among the consumers. In market failure, participants’ self-promoting actions fail to achieve an efficient outcome, so that it is possible to increase the welfare of one or more group of individuals without harming someone else welfare. Market failures can first result from an externality, which is an interdependency among two or more individuals that is not taken into account by a market transaction (Baumol & Blinder, 2011). An example includes pollution. Market failure may also be associated with public goods. A public good’s benefit can be received by payers and nonpayers alike once the good is provided. The provider cannot, therefore, keep a non-payer from consuming the good’s benefit, and this inability limits incentives on the part of users to finance the good’s provision. An example of such a public good is defense. A third source of market failures may stem from property rights that are either undefined or owned in common unrestricted or open access. Markets, which allow for the voluntary exchange of property rights, can only operate if these rights are recognized and protected. Common ownership when coupled with open access, would also lead to wasteful exploitation in which a user ignores the effects of his or her action on others (Baumol & Blinder, 2011). The presence of market failures means that some form of state intervention on a collective basis may be needed. Sometimes the state could be intervening as an outside authority to negotiate an agreement among the concerned parties. Fig. 1 (below): Examples of Market Failure and Ways the Government Intervenes To Remedy Them Types of market failure: • Externalities • Merit and demerit goods • Public goods • Natural monopolies • Equity Types of government intervention: • Taxes • Subsidies • Regulations • Public provision • Transfer payments State intervention results into mixed economy system. This is where there is a merge of public and private organization and ownership of property. All rely on markets for some purposes, but also assigns some role to government. A mixed economy is one with some public (state) influence over the working of free markets. There may also be some public tenure amalgamated with personal property. It is more or less a blend of socialism and capitalism. In mixed ...Download file to see next pagesRead More
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