Government Intervention in a Mixed Economy - Assignment Example

Question Government Intervention in a Mixed Economy Economics is all about allocation of scarce resources. Among several economic systems, free market economies are theoretically assumed to allocate resources automatically. In the Modern day economic world, however, it has become imperative for the governments to intervene in the economic activities taking place in the market. As a result of this government intervention an economy is called a mixed economy. In a mixed economy, government has got to play a supportive role for the socially efficient working of market. Moreover, government makes rules that facilitate the free market forces and reduce any barriers affecting them (Aggrey, 2003). However, the magnitude or the level of government intervention differs from country to country depending upon several reasons (Deardorff 2000, p3). Some of the reasons why a government needs to intervene in an economy relate to the microeconomic environment and some of them are connected to the macroeconomic conditions in the country. In case of microeconomic interventions, government regulation of the private industry may further by divided into economic and social regulations (Deardorff 2000, p3). Economic regulations refer to the control over the prices of commodities, protection of consumers and other small firms form powerful economic agents and reinforcement of competitive forces in the market economy. On the other hand, social interventions involve decision concerning better workplace, cleaner environment etc. (U.S. Department of State). In the same way, there are number of other economic circumstances that call for government intervention which assist the market forces in their smooth operations. First of all, governments may provide information to the economic agents and then assure a smooth flow of information in the market. Secondly, in case of negative where unwanted demerit goods are produced as well as positive externalities where lesser merit goods are produced by the economy- cases of market failure- governments need to play a role to mitigate the magnitude of the welfare loss (Deardorff 2000, p4). Thirdly, governments must provide public goods that the market would fail to supply to the general public. Fourthly, the government must reduce or control the development of non-competitive behaviour based on the assumption of economic rationality of self-interest which causes market distortions like the development of monopolies, price-leaderships, exploitation of small firms and consumers by large firms etc. (p5). And last but not the least, if the free market forces result in extremely unequal or inequitable distribution of income, government needs to intervene in the market so as to redistribute income (p9). In addition to the microeconomic goals, governments also need to intervene in their economies for macroeconomic disorders. Some important issues in this regard include unemployment, sustainable economic growth, inflation, equilibrium in the balance of payments etc. (economicshelp.com). Besides these, some less important issues also require government intervention in the market; these issues include government deficit and exchange rate stabilization etc. Nonetheless, non-economic considerations also provide the justification for government intervention. For example, matter like environmental hazards and equity issue caused by the untamed economic behaviours and free market operations call for government intervention (Deardorff 2000, p3; economicshelp.org). The successful government intervention in the market rests on the wisdom and the justification to intervene in the market. It can be argued that not all interventions by the government are fruitful but those that do not introduce any distortions in the working of the market forces (Deardorff 2000, p13). (560 words) Question 2.1. Cars have become a necessity of life and its production a costly yet lucrative business. Palladium is a precious metal used in the production of car as a catalyst. According to the passage, the demand for Palladium fell due to the development of a substitute, a new catalyst, which is not only cheaper but is also capable of maintaining the quality and performance of the vehicle. The market conditions for Palladium can be graphically shown as in Figure 1. below: Economic theory suggests that the demand for Palladium is derived demand as it is a factor of production in the manufacture of cars and it does not have its own demand by a demand dependent upon the demand for cars (Perloff 1998, p.A23-A24). The article tells us that there is an international pressure building upon car manufacturers to reduce their cost of production in order to stay competitive in the market. However, Palladium is a precious metal and is, thus, costly. Therefore in the face of such pressure, there is always a tendency in the market to look ways to lower the prices in order to maximize profits (p.251). Nissan and Mazda have found an answer in the form of a newer technology that enables them to get rid of the costly Palladium. Tata, moreover, has announced to produce $2500 cars. The international pressure, hence, dictate that the manufacturers substitute Palladium for newer technology (p.189). Palladium’s demand, as a result, falls with the spread of the news of availability of a cheaper substitute and consequently the price of Palladium falls. Graphically this situation is presented in figure 1. which shows that the demand for Palladium fell from D1 to D2 as a new technology was supposed to have been developed by Mazda as well as Nissan. This technology was supposed to enable the producers of cars to use another cheaper catalyst as a substitute for Palladium. The result was a fall in the equilibrium price from P1 to P2 as the producer anticipated to have shifted to the newer technology. Thus the quantity of Palladium traded in the market fell from Q1 to Q2. (369 words) Question 2.2. Car manufacturing is a lucrative business due to ever-increasing demand all around the world. In order to produce and supply to the surge in the demand for cars, several firms have entered the industry competing globally in the international market. There is a tendency of the firms to lower the cost in order to become more and more competitive (p.246). Japan is the pioneer in reducing the cost of production to the lowest possible levels. The law of demand tells us that these firms need to lower their prices to improve their demand for the cars. The reduction in prices may follow the reduction in the cost of production which may come in many ways. The use of newer technology is one of the answers in this regard. This is what Nissan and Mazda have done; they have announced to have found the technology that enables them to use cheaper factors for production instead of precious metals like Palladium and Platinum. They say one man’s pleasure is another’s pain. The cost advantage by one firm leads to loss of customers by anther in such oligopolistic situations like this one where there seem to be only a few dominant but interdependent sellers (p.414). The reduction in the cost of production may provide opportunity to one firm to become a low-cost/low-price leader. Nonetheless, the reduction by other firms makes brings them back into market. This is what happened: Japan has already been producing low-cost cars and Tata has made its announcement of $2500 cars. Nissan and Mazda, Thus, have come back into the market by developing new technology and reducing their cost of production. Lower cost, nevertheless, results in increased low-price market supply. This can be shown graphically as in figure 2. Figure 2. shows that the new technology enables Nissan and Mazda to produce cars at lower cost. The reduction in cost results in the supply curve shifting to the right- an increase in the supply from S1 to S2. The demand being the same, increase in the supply results in new equilibrium points and the prices of Nissan and Mazda fall from P1 to P2. This increase in the supply results in improved market competitiveness to the two firms and the new quantities of cars traded in the market rises from Q1 to Q2. (380 words) Question 3. Technology plays a very vital role in the success of an organization. Technology opens the doors for newer trends and opportunities besides reducing the extent of the threats from the competitors. There have been numerous changes in the ways businesses are carried out in the international markets and the effects of the use of technology have been very promising. The free flow to information has become so wide spread that the use of new technology has become imperative. In addition to such flow of information, the availability of the technology is becoming not only easier and easier nut also cheaper. Global firms, thus, are taking enormous advantages from the use of technology (academon.com 2002). Is the newer technology in the global car industry necessary? The availability of newer technology will result not only in lower prices but also improved cars. The non adoption of the newer technology will result in loss of market, first of all. This is because the prices of the competitive car manufacturers will fall and they will develop better cars at lower prices. Therefore, a firm will suffer the loss of performance and quality as well (Bates et al. 2000). Secondly, the competitiveness of the firm will deteriorate in terms of cost effectiveness, quality and performance. The rival firms in the car manufacturing industry will become leaders and a time may come when this business might wind up due to inability to stay in the market. (240 words) References Academon.com. 2002. Global Benefits of New Technology. [Online] available at http://www.academon.com/Essay-Global-Benefits-of-New-Technology/23005. Accessed 18 April, 2010. Aggrey, Bigala. 1st April 2003. Government Intervention in a Market Economy. [Online]. Highbeamresearch.com Available at http://www.highbeam.com/doc/1G1-115228142.html. Accessed 18 April, 2010. Bates, Virginia M, Burke & Brain. Oct, 2000. Focusing on the Benefits of New Technology. [Online] money watch.com. Available at http://findarticles.com/p/articles/mi_qa3615/is_200010/ai_n8918593/ Accessed 18 April. 2010. Deardorff, Alan V. 10 February, 2000. The Economics of Government Intervention and its International Dimensions. University of Michigan. Kluwer Publishers. Available at http://www.fordschool.umich.edu/research/papers/PDFfiles/00-018.pdf. Accessed 18 April, 2010. Economicshelp.org. N.d. Government Intervention in the Macro Economy. [Online] available at http://econ.economicshelp.org/2007/05/government-intervention-in-macro.html [accessed at 18 April, 2010] Perloff, Jeffrey M. 1998. Microeconomics. California, Berkeley. Addison Wesley Publishing Company. U.S. Department of State. N.d. Laissez-Faire Verses Government Intervention. [Online]. About.com: economics. Available at http://economics.about.com/od/governmenttheeconomy/a/laissez_faire.htm Accessed 18 April 2010. Read More