Role of the Government Is a Market Economy - Literature review Example

Introduction An ideal market economy is where economic forces of demand and supply act without external influence. Unfortunately, a typical real life market is controlled by the government or a regulatory body. Government control is inevitable, without government control, business in a market economy may not be possible or extremely difficult. The intervention of the government does not however inhibit the natural forces of economics like supply and demand, the government only intervenes to shape the behavior of the market economy in order to ensure that there is fairness and the economy is stable. It is because of the need for government intervention that a truly free market economy is not possible. The specific role of the government are outlined in this analysis in order to shade more light on the pivotal role of the government in a real market economy. Role of the government is a market economy According to Wang (2005, p.23) Government role in the market economy is very imperative; operations in the market economy may not be possible if the market was totally free and only subject to the economic variables of demand and supply. The main purpose of the government in the market is to control and improve the functions of the market economy. In order to do this, the government carefully makes decisions that involve regulating and intervening on market forces. Government regulations include taxes, license and fines. There are values of a market economy; some of the most important values include: discipline, tolerance, honesty, cooperation, courtesy, responsibility and enterprise. It is the responsibility of the stakeholders in a market economy to ensure that these values are adhered to (Hirschey, 2008, p.65). The role of the government is therefore to ensure that these values are adhered to in the most reasonable way possible. There are a number of indispensable government roles in a market economy; a good example is public goods and national defense. The uniqueness of national defense goods from other common goods such as computers and oranges makes it impossible for individuals to transact (Watts, 2012, p.1). It is ultimately the responsibility of the government to secure its citizens; this is why it purchases national defense weapons. Other examples of public goods which are under the control of the government includes, roads and railway network, programs aimed at securing food and curbing insects, radio and television signal transmission over airwaves among others (Watts, 2012, p.1). Due to the fact that there are public goods and other unique goods such as then defense weapons which individuals or private companies cannot purchase means that there cannot be a truly free economy which is not controlled in any way by the government. As elaborated by Watts (2012,p.1) the government is mandated the responsibility of correcting market failures such as economic slowdown and external costs. A good example of this is when government intervention is necessary in the case of pollution and external costs. As an example, a paper manufacturing company produces paper for cardboard and writing papers among other uses. If this manufacturing company is located near a river, it means that the company’s byproducts will be dumped into the river and hence causing pollution that directly affects the community living in the area and benefit from the river. Since the river is not owned by any person(s), there is no force that will compel the company to stop polluting the river. More so, cleaning the river will demand resources and hence leading to usage of money (Watts, 2012). The paper company gets profits by selling its paper products at a lower price because it does not absorb the cost of cleaning up the river. This leads to more production because of the high demand due to lower prices, in order to meet these demands, the company produces more paper and hence causing more pollution to the river. If this situation continues, the company will get undue advantage over its competitors who contribute to the external cost of handling the pollution. In the normal working marketplace, this is usually not reflected as part of the production cost. The role of the government in this case is to intervene by rectifying the imbalance evident (Watts, 2012,p.2). The government can therefore take measures and force the company as well as the consumers of the product to contribute cleanup cost. In this case, the government ensures that the beneficiaries of the product pay the entire cost of production and its consequences. This is also another clear example that justifies why there can never be a totally free market, some market economy variables mandates government intervention as highlighted in this example. The main reason for government intervention is to control overproduction and overconsumption of products and services which results to external cost (Langran, & Schnitzer, 2007,p.127). Nestle (2007, p.55) notes that the government is also responsible for maintaining a healthy competition in the market place. The government does this by ensuring that the market economy is free from monopolies. It is true that companies vary in sizes and resources, companies that have more resources can therefore take advantage of economies of scale and lower their prices extremely low in order to kick out upcoming competitors. The government intervenes in this case by setting a benchmark for prices and allowed practices in the market. This further elaborates why it is very difficult to have a totally free market economy. Competition in the market is subject to regulations in order to ensure fairness especially to small businesses which are still in their development phase (Tanzi, 2011, p.121). The government is also responsible for enforcing legal system and social framework for doing business in a market economy. In essence, minimal or no business takes place in an environment where there are no legal rights for producers and consumers to trade and own economic resources. This is the reason why governments keep vital documents such as title deeds for houses and land and enforce legally binding parties between two contracting parties (Taylor, 2006, p.56). Basically buyers need the confidence that the products being sold by the seller are actually theirs, both the buyer and the seller also need assurance that once an agreement is made, it will be carried out as agreed. This case is same for workers in companies, the working condition created by the employer needs to be acceptable and provided consistently. The government creates an impartial and fair criminal justice system that is in a position to deal with any dispute. If there is no legal system, it would be extremely difficult to carry out business; more so, conducting business would be very expensive in a market economy. The government also protects private property such as factories, land, stores and other tangible goods (Taylor & Weerapana, 2007,p.57). This protection also extends to intangible assets such as intellectual property for creativity and innovations. The government ensures that the owners of the IP benefit from them when others use them; this is achieved through patents and copy rights (Wang, 2005). According to Kates (2011,p.87) since the government acts for the interest of everyone in the economy, it is a fact that a section of the population is not skilled and hence not in a position to be employed. The government steps in by redistributing the income. This is normally achieved through taxation polices that aim at taxing the wealthy in order to provide for the needy. This is a good example of a controlled economy rather than a free one. The government is also responsible for stabilizing the economy by putting in place measures that reduce unemployment and inflation thus enhancing economic growth. In the recent recession, government action through monetary and fiscal policies stimulated economic growth by inducing stimulus plan (Åslund, 2009, p.98). The government through fiscal policies works to maintain a stable economy and stable currency, this government role in an economy is a direct control of the market behavior. As an example, if the production rates of companies rise rapidly while the demand also rise, the government can raise taxes and also increase lending rates. This action will slow things down and hence resulting in a government regulated market rather than a free market (Åslund, 2009,p98). Conclusion As evident, government role is essential for any market economy. The vital role played by the government is managing an economy supersedes the advantages of a free market; this is the main reason why there can never be a free market economy. If a free market economy is allowed to regulate itself, first unskilled people will be forced out of the economy, resourceful companies will monopolize the market and there will be no supply of essential public and defense goods hence leading to insecurity. These are among the many disadvantages that will result from a free market. More so, doing business in a free market will also be difficult if there is no regulating body that ensures that the transactions of goods and services in the market are completed as agreed. Contracts could easily be breached without consequences and hence making business almost impossible. References Åslund, A. (2009). How Ukraine Became a Market Economy and Democracy. New York, NY: Peterson Institute. P.98-102 Hirschey, M.(2008). Managerial Economics [With Access Code]. New York, NY: Cengage Learning. P.55-72 Kates, S. (2011). Free Market Economics: An Introduction for the General Reader. London: Edward Elgar Publishing. P.87-99 Langran, R., & Schnitzer, M. (2007). Government, Business, And the American Economy. London: Rowman & Littlefield. P.127-132 Nestle, M. (2007).Food Politics: How the Food Industry Influences Nutrition and Health, Revised and Expanded Edition. California: University of California Press.P.p.56-67 Tanzi, V. (2011). Government Versus Markets: The Changing Economic Role of the State. Cambridge: Cambridge University Press. P.121-127 Taylor, J. (2006). Principles of Macroeconomics. New Jersey, NJ: Cengage Learning. P.56-72 Taylor, J.B., & Weerapana, A. (2007). Economics. New York, NY: Cengage Learning.p.56-67 Wang, N. (2005). Making A Market Economy: The Institutional Transformation Of A Freshwater Fishery In A Chinese Community. Sydney: Routledge. P. 23-25 Watts, M. (2012). What is a Market Economy? U.S. Economy Retrieved from http://infousa.state.gov/economy/overview/mktec8.html Read More