The Role of Government in Market Economy - Essay Example

Running Head: government and market economy The Role of government in Market Economy Name Institution Date Introduction Economics entails the study of market economies. Market economy is the abstract image which involves interaction among human beings or actors under specific conditions. These set conditions include specialization, use of money, a system of private and free enterprises (Nelson, 2004). In the United Kingdom, government involvement in the market economy has been targeted to enhance effective market competition where possible, and to promote consumer protection as far as their interests are concerned. Government participation has tremendously capped the prices charged by the dominant companies for the purpose of promoting efficiency and fairness, while at the same time ensuring that they get a return on their investments (Daly, 2005). Competition in the markets have contributed to some extend material well-being of consumers however, they have their own flaws. Much of these benefits can be realized when the government takes part in the market economy by mending these flaws and controlling the harsh tendencies portrayed by the market economy (Nelson, 2004). Therefore, it is important to understand the role of government in the operations of the market economy, and they include the following. The government has basically three economic functions to play in the market economy. The functions include promoting equity, increasing market efficiency, and enhancing economic stability and growth (Nee, 2000). Efficiency is achieved through encouraging competition, availing public goods and preventing externalities such as pollution. A free and fare market economy is fully controlled when there are checks and balances of the perfect competition. Perfect competitive markets provide room for perfect allocation of resources which helps the economy to grow. According to Baumol, (2003), when industries are subject to these checks, markets produce volumes of outputs which are desired by consumers by use of efficient techniques and least inputs. One major deviation from market efficiency originates from elements of imperfect competition or even monopoly. Although under perfect competition firms or consumers don’t affect prices, in imperfect competition, buyers or sellers can affect the prices of goods in the market. Incase imperfect completion arises; society may be forced to move inside the PPF. The output level of goods produced by a monopoly would reduce much below efficiency margin, thus making market economy’s efficiency to suffer. Gwartney, Lawson, and Norton, (2008) argue that imperfect competition provides a pattern of very high price and very low output which leads to inefficiencies. The government comes in to control the extreme patterns of imperfect competition. It sometimes regulates the price and returns of monopolies to the benefit of the consumers. Also, the government through its laws prohibits consumer exploitation through acts like fixed pricing, and also by agreeing to divide up business markets. The most effective way to control imperfect competition is by the government opening markets to competitors, either foreign or domestic (Nee, 2000). Unless the government intervenes through regulations or tariffs, the existing few monopolies may withstand the attacks posed by the competitors leading to continued inefficiencies. The government also controls the market through provision of public goods. Public goods are those commodities whose cost of increasing service provision to extra persons is zero and all individuals enjoy the service without discrimination (Nelson, 2004). Since the private sector insufficiently provides public goods, the government comes in to encourage the production of the same. When the government buys public goods like lighthouses or national defense, it is essentially acting like any given spender. When it casts adequate dollar votes in specific directions of the economy, resources will flow there. In order for the government to facilitate its spending on public goods and income-redistribution initiatives, it must find enough revenues. The revenues are collected from taxes levied on wages, consumer goods, corporate and personal incomes among other items (Daly, 2005). According to Baumol, (2003), another type of inefficiency which the government controls in the market economy occurs when there are externalities. Externalities or spillovers impose costs or benefits involuntarily on individuals. However, the government is more interested in negative externalities compared to positive ones. As the society continues to have a dense population and as chemicals, energy and other materials’ production increases, so does the effects of externalities or spillover. The government regulations are put in place to control water and air pollution, hazardous wastes, radioactive materials, dangerous drugs and foods which are part of externalities. Even where the market system performed well, flawed outcomes like lack of equity are likely to be seen. Markets have been criticized for failing to produce fair distribution of resources. Income and consumption inequalities produced by a market economy are not acceptable by the government. Income in an economy is determined by various factors like inheritance, education, luck and factor prices (Heijdra, and Van der Ploeg, 2002). The distribution of income that results may actually not be fair. The government uses some tools to reduce income inequalities across the nation. One of the tools is progressive taxation, where by large income earners are taxed highly than small income earners. It may also impose huge taxes on wealth or extremely large inheritances in order to break the privilege chain. Since low tax rates may not adequately address the problems of those people without income, Nelson, (2004) notes that the government can use transfer payments to close the income inequality gap. The most common transfers include aid for the blind, elderly, disabled, those with dependants and also unemployment insurance for people without jobs. These kinds of arrangements by the government help to protect the disadvantaged from privation. The government through subsidizing consumption of low income people helps to enhance equity. It can do this through provision of subsidized medical services, food stamps, and reduced cost of housing. Since the origin of capitalism, there have been significant changes in the market economy in respect to inflation and recession. Rising prices and high unemployment in the market are concerns to the government, and it has to ensure that it controls them for the economic stability of the nation. The government uses fiscal and monetary policies to control the level of output, inflation and unemployment in the nation. The government fiscal policies entail its power to collect taxes and to spend its revenues. The monetary policies on the other hand involves money supply and related interest rates which have an impact on investment in capital goods together with other spending which are interest-rate sensitive. These according to Baumol, (2003) are the fundamental tools in the macroeconomic policy which the government can use to control the rate of growth and output level, employment and unemployment levels, total spending, level of price and inflation rates in the economy. Government participation in market economy has a number of consequences as shown above. It is important that before the government intervenes, it should understand what it means to various actors in the market economy. Buyers and sellers interact freely in a free market economy with buyers making a decision to purchase. The buyer’s options demonstrated through purchasing power indicate a pattern of income and wealth distribution in a nation (Heijdra, and Van der Ploeg, 2002). This therefore makes the government to come in by setting up property rights and other institutions to keep an eye on free market. In today’s business world, free markets are not in existence; instead what exist are mixed market economies. A free market involves participating in any kind of business activities without restriction from the government. It is important to note that existing markets depend on laws which dictate the type of commodities to be traded and those that are not supposed to be traded in. Slavery for instance, is not allowed in today’s market economies, also child pornography and blackmail. Unfortunately free markets always tend to carry along such moral constraints and yet governments does not allow. Furthermore, free markets depend on property rights created and enforced by the government (Nee, 2000). Another reason why I think free markets are irrelevant is because they require a high level of mobility and freedom to shift from relationships which are not profitable. A society where people are always on a move is likely to be a society where law-binding is compromised with. The existence of government policies and legislation cannot allow free market to exist since the government is interested in protecting its citizens from all sorts of exploitation. Through such regulations, business practitioners are expected to operate within the established laws, and going against them is not accepted. Conclusion In conclusion, the government plays a critical role in the market economy by ensuring that public interests are safeguarded at all costs. Monopolistic tendencies of some business operators are the most discouraged by the governments since they always want to maximize their profits at the expense of the consumer. Moving from imperfect competition to perfect competition requires government intervention through various policies discussed above. Consumer exploitation through escalating prices of goods and services, poor quality commodities and unsatisfied consumer needs are part issues the government is expected to address sufficiently. For the economy to grow, all the players that is, the government, business enterprises, and the general public have to work in corporations with each other as far as service delivery is concerned. References Nelson, R. R. (2004). The market economy, and the scientific commons. Research policy, 33(3), 455-471. Heijdra, B. J., & Van der Ploeg, F. (2002). The foundations of modern macroeconomics. Daly, H. E. (2005). Economics in a full world. Scientific American, 293(3), 100-107. Nee, V. (2000). The role of the state in making a market economy. Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift für die gesamte Staatswissenschaft, 64-88. Gwartney, J., Lawson, R., & Norton, S. (2008). Economic Freedom of the World 2008 Annual Report. The Fraser Institute. Baumol, W. J. (2003). Welfare Economics and the Theory of the State. The Encyclopedia of Public Choice, 937-940. Read More