The Role of Government in a Market Economy - Case Study Example

Running Head: MARKET ECONOMY Name Course Instructor Date Market Economy It is necessary that before explaining the role of government in a market economy to define what is meant by a market economy. A market economy is defined as that economy in which decisions in regard to investment, distribution as well as production are largely based on supply and demand. Here, the prices of services and goods are determined in a free price system. It is quite evident that that market economies can widely range from a free market and laissez-faire variants to various interventionist and regulated markets variants. Across the globe, most existing market economies include a certain degree of state directed or economic planning activity thus categorized as mixed economies. With regard to the various roles of the government within a market economy, there are five key functions the government performs (Case, 2004). Case (2004) maintains that, the government is entitled to provide the market economy with a well defined legal structure. This is considered as the most important function a government needs to undertake as without it a country economy will automatically collapse. Here, the government is required to ensure that proper property rights are implemented. Case (2004) suggests that, it is also important that the government provide enforcement contracts and impose penalties for business or organization that are engaged in unethical and illegal play. In order for the government to perform this function efficiently, it is important for it to furnish the economy with legislations, regulations and rules. In addition, it is important that the government ensure that companies deliver quality products through defining ownership rights as well as enforcing contracts (Case, 2004). The second function of a government is to maintain competition within a market economy (White, 1999). Evidently, since competition is the efficient and optimal market mechanism that largely encourages producers as well as resources suppliers to respond to customer independence and price signal, the government is required to fight non competitive behavior and monopoly power. Here, the government has the mandate to create anti-monopoly laws that are largely designed to promote positive competition as well as regulate business behavior. It is also the government role to redistribute income. Here, the government in given market economies should inevitably engage in programs that assure income redistribution through establishing explicit intention of making tax policies fairer to all its citizens. Further, it should engage in limiting the concentration of resources while at the same time maintains a wider diffusion of economic power among different households. White (1999) suggest that, other means that the government is involved in redistributing income is establishing price support programs such as low interest loan to student as well as farm subsidy to farmers based on their family income. Social security, welfare and Medicare programs are other example of government programs that largely support the elderly, sick and poor. According to Giddy and Stockinger (2002), the government is expected to promote growth and stability across the country market economy. It is the duty of the government to guide the overall market economic activity through maintaining a steady growth, price stability as well as creating high level of employment. Here, through adjusting its fiscal policy and spending, the government can be able to speed up its market economy rate where in the process stabilizing on level of prices and creates employments (Giddy and Stockinger, 2002). Fiscal policies are used to employ government spending as well as tax programs so as to stimulate a national economy especially during low inflation and high level of unemployment whereas monetary policies are used by the government to change a nation supply of money as well as credit availability. In addition, the government can use monetary policy where it regulates the nation money through interest rates, money supply and various reserve requirements. Both monetary and fiscal policies ensure that the government is able to provide economic conditions in which a market economy of private enterprises can function effectively. Further, these policies assist the government stabilize a nation legal tender eliminating the need for inefficient and burdensome trading systems. Finally, it is the government role to correct various market failures such as economic slowdown, pollution and external costs. External costs are those costs that are not reflected in the price by way of usual workings of the market place. In such a situation, the government is expected to rectify such imbalances (Andrew, 2007). Through it intervention, the government can be able to force producers to do away with external costs. In simpler sense, the government role here is to make those enjoying the benefits of selling as well as consuming a product pay all costs involved in producing and consuming the product. The government can implement rules and regulation where industries are made to reduce pollution (Dani, 1996). Free market economy It is quite evident that central banks as well as politicians at the forefront of recovering from the recent global recession there is a growing question on whether free markets exists and whether there can never be a truly free market economy. A free market economy is defined as that market place where goods and services prices are largely determined by supply and demand. Although free markets are commonly associated with capitalism, these markets have been advocated by socialists they have widely been included in numerous proposals for market socialism generally based on publicly owned enterprises, employed owned cooperatives as well as self management’s enterprises operating in a given free market. There are several concepts that are linked to free market economies namely; economic equilibrium, low barriers to entry spontaneous order as well as supply and demand (International Monetary Fund, 2009). The fact that critics dispute the claim that free market economies create perfect competition demonstrate why there can never be a truly free market economy. In any given market there can never be a perfect competition. In addition, it is important to note that anti-capitalists are right by stating that free market is an abstract concept that has no basis of being term as a true existence since it has no empirical reality. It is argued that free market economy is a mere theoretic construct which signifies inexistence of a definable free market (International Monetary Fund, 2009). It is further evident that there is no economists can be able to position a given society or rather claim that that particular society has been practicing a free market economy. Ideally, a free market economy is where all individuals in a given market place cooperate voluntarily without any kind of coercion. Therefore, economic decision in a free market is agreed upon freely only by the parties involved in any given transaction. Government involvement in ensuring remedy to market failures that is constantly held as an inevitable absolute result to various free market economy principles coincide with the definition that no force is acted upon by the government in regulating free market (Frederic, 1997). Another reason why there can never be truly free market is the fact that the market is linked to numerous struggles of bargaining from competitors where market outcomes are largely determined by self gain or interest. This therefore indicates that the free market economy system is flawed and is largely rigged towards rewarding the greed. The party that which is considered to have the stronger economic power is able to offer any price. The accumulation of this power is a known characteristic note of today economy which unrestrained free competition is only survived by those parties that are strongest. It is for this reason that many economists argue that free markets do not produce justice and therefore cannot really exists (Frederic, 1997). It is evident that there can never be truly free market economies in the essential services and goods such as medical care, education as well as law and order are either inadequately provided or not provided at all. Free market economies lead to the formation of monopolies which dominate industry to the lack of regulation by the government forcing small companies out discouraging new market entry (Bockman, 2011). Free market economies have been viewed to exploit consumers through provision of poor quality goods and high price set up. In addition, free market cannot truly exist since it is considered to be a commonplace for those who are wealthy. Usually producers allocate their resources in manufacturing luxurious goods so as to increase their profit margin forgetting the poor and marginalized communities’ plight (Wessels, 2006). Finally, it is evident that there can never be a truly free market economy since in this type of market, underemployment of resources will only exists to those industries declining due to a drop of demand because of the existence of a dramatic time lag before resources can be moved to new and expanding industries (Wessels, 2006). The dramatic time lag lead to increase in social costs forming rise in unemployment, poor housing, poor health, drug addiction as well as delinquencies. This give the indication that free market economies provide no definable mechanism that ensures that a nation citizen enjoys basic needs even when they cannot afford them. It is therefore evident that even with the great over indulgence in this kind of trade, there can never be truly free market economy. References Andrew, G. (2007). Foundation of economies. Oxford: Oxford University Press Bockman, J. (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford: Stanford University Press Case, K. (2004). Principles of Macroeconomics. New York: Prentice Hall Dani, R.(1996). Why do more open economies have bigger governments? London: Center for Economic Policy Research Frederic,. S. (1997). Is There a Role for Mone­tary Aggregates in Monetary Policy? Journal of Monetary Econo­mics, vol. 40, pp. 279-304 Giddy., J and H. Stockinger. (2002). “Economic models for resource management and scheduling,” Concurrency and Computation: Practice and Experience, vol. 14, no. 13-15, pp. 1507–1542 International Monetary Fund (IMF) (2009). Fiscal Implications of the Global Economic and Financial Crisis (Occasional Papers, vol. 269) –Washington, D.C Wessels, W. (2006).economics. New York: Barron’s White, L. (1999). The Theory of Monetary Institutions. Hoboken, New Jersey: Wiley-Blackwell Read More