The Role of Government in a Market Economy - Essay Example

Running Header: The Role of Government in a Market Economy Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: A market economy refers to an economy whereby decisions relating to production, distribution and investment are made based on demand and supply (Dick, Blais & Moore 2007, p. 21). This implies that the choices regarding the allocation of resources are principally determined by the markets. However, the interests and the welfare of the whole society may not be considered because firms make decisions that maximize their economic well-being. This in turn makes the markets to fail hence the need for government intervention. Government involvement is thus vital in order to provide mechanisms necessary to ensure efficient operations in a market economy. The objective of this paper is to identify the role of government in a market economy. Additionally, the paper will show why there can never be a truly free-market economy. According to Merchant (2008, p. 120) government has a role of providing public goods in a market economy. This is because some goods and services like security cannot be provided adequately and sufficiently by the private sector. Watts (2012) emphasizes that the role of government in providing public goods is obligatory because they are subject to the problem of free riding. This means that once a person produces public goods and services other people can potentially use them without paying for them. Dick, Blais & Moore (2007, p. 23) note that public goods suffer from the free rider glitches because they can be consumed jointly. As a result, public goods may remain unproduced in an economy because firms can incur excessive costs in preventing non-payers from using these products. The role of providing public goods is thus left to the government. This in turn explains why a true free market economy cannot exist. Government has a role of stabilizing the economy through the use of both fiscal and monetary policies (Langran & Schnitzer, 2007, p. 35). In order to achieve stable economic growth, the government should actively participate in the economic market. This can assist in ensuring price stability and balance of payment equilibrium as well as reducing unemployment and promoting economic growth. According to Watts (2012) this role takes the form of macroeconomic stabilization whereby the government uses fiscal and monetary policies so as to control interest rates and the supply of money. Fiscal policies encompasses the use of expenditure and taxes so as increase or to decrease the level of aggregate demand. On the other hand, government uses monetary policies in order to control the amount of national output and to control variations in price levels through the supply of money (Mankiw & Taylor, 2010, p. 798). The role of stabilizing the economy cannot be performed by the private sector because their aim is to maximize their earnings. Therefore, government in market economy must play a vital role of stabilizing the economy and this demonstrates why there can never be an economy that is truly free. Dick, Blais and Moore (2007, p. 23) argue that the government has a role of maintaining competition in its market economy. To do this, the government is required to create as well as to enforce antitrust laws so as to regulate the behavior of natural monopolies. Taylor and Weerapana (2011, p. 321) affirm that a key role of government in a market economy is to maintain competitive markets by implementing antitrust policies or by regulating firms. Competition can be limited in some industries especially when the level of demand is only capable of supporting few companies which are large in size. This can motivate these firms to collude and increase the prices of their products and limit the entry of new firms. Thus, by regulating monopolies, the government can be able to increase competition by enabling new firms to enter these industries. This can assist in improving people’s access to goods and services at affordable prices. According to Merchant (2008, p. 120) maintaining competition in the market is the most proficient way of ensuring effective allocation of goods and services and at the same time providing alternatives for customers. Additionally, it can help in improving efficiency and making sure that customers are provided with the best services. Government has an obligation of protecting its citizens from exploitation and this implies that it has a role of maintaining competition. Consequently, this demonstrates why a true free market economy cannot be in existence because the government interferes with the markets in order to uphold competition hence protect its citizens. Private markets in an economy may fail to produce certain essential goods and services. Additionally, these goods may be produced inadequately or in excessive amounts and this can lead to market failures. Thus, the government has a role of correcting these failures by trying to ensure that the right quantities of the given goods and services are produced (Lopus, p. 30). According to Munday (2010, p, 82), the amount of goods and services produced by private markets depends on external benefits and external costs. External costs arise when the total cost of consumption or production of a good is not paid by the consumers and the producers. Instead, the cost is transferred to other people. Large amounts of a product are thus produced when other individuals pay the cost involved in consuming and producing the good other than the consumers and the producers (Watts, 2012). Consequently, the government may be forced to tax consumers or producers in order to correct this condition. Conversely, external benefit transpires when individuals other than consumers and producers enjoy some benefits associated with consumption and production of a good. This can cause the good to be produced in low quantities because producers and consumers do not benefit fully from the product. As a result, the government may offer subsidies to producers and consumers of such a product. Lipsey and Chrytal (2011, p. 18) emphasize that the government has to intervene so as to prevent the market from collapsing and this shows why it is difficult to have market economies that are truly free. Merchant (2008, p. 126) states that government has a role of creating and maintaining social and legal framework. This involves creating laws and providing courts so as to ensure that the market operates efficiently. According to Watts (2012) market economies require legal structures in order to enable consumers and producers to trade as well as to own economic resources. Additionally, rules enable government to enforce contracts between market participants and to protect and recognize the right to own property. Merchant (2008, p. 120) observes that market operations may become more difficult and expensive to conduct when there is lack of a fair and just legal system. Therefore, in a market economy, government must institute and protect the right for individuals to own properties and recognize the economic gains associated from using those assets. Furthermore, to protect and motivate innovative individuals, the government has a role of issuing copyrights and patents. These rights give the holders privileges to market and sell their products. In enforcing and defining effective legal framework and property rights, government can be able to build a social environment that permits economic markets to operate efficiently. However, this makes the government to take an active participation in the market hence it explains why there can never be a true market economy. The contractual exchanges and arrangements needed for free market economies cannot exist without the enforcement and protection of a governmentally provided legal system (Myers, 2011, p. 19). According to Langran and Schnitzer (2007, p. 37) government has a role of redistributing income. This is because some individuals lack the necessary skills and resources needed to earn income in a market economy. Government must engage in programs that ensure equitable redistribution of income in order to ensure the well-being of its citizens. Merchant (2008, p. 128) states that government should use both taxes and social welfare programs in order to make income distribution more fair. Additionally, government has an obligation of limiting concentration of wealth among few individuals so as to prevent the existence of wider economic gaps among households. Government must interfere with the economy so as to ensure equity in income redistribution. This in turn demonstrates why true free market economies can never exist. Watts (2012) emphasizes that government in a market economy should perform the role of supporting the poor and the needy in the society by implementing government spending and taxation programs. In conclusion, government has a role of providing public goods in a market economy. This is because public goods may not be sufficiently produced by the markets. Additionally, it has a role of stabilizing the economy as well as correcting market failures by ensuring that the right quantities of a good are produced. Furthermore, government has the obligation of providing a legal system in a market economy. Laws assist in enforcing contracts between buyers and sellers as well as in defining and protecting the right to own properties. Lastly, government has a role of ensuring equitable redistribution of income among its citizens. Therefore, government participation in a market economy is indispensable and this illustrates why a true market economy cannot exist. References Dick, J., Blais, J., & Moore, P.(2007). Civics and Government: Focus on Economics, National Council of Economic Education, New York. Langran, R., & Schnitzer, M.(2007). Government, Business and Economy, Rowman & Littefield, New York. Lipsey, R., & Chrystal, A.(2011). Economics, Oxford University Press, South Melbourne. Lopus, J.(2008). Economics in Action, National Council on Economic Education, New York. Mankiw, N., & Taylor, M.(2010). Economics, Cengage Learning, Mason. Merchant, J.(2008). The Role of Governments in a Market Economy, International Journal of Economics, vol. 52, no. 2, pp. 117-131. Munday, S.(2010). Government and Economic Markets, Heinemann Publishing, London. Myers, D.(2011). Economics & Property, Routledge, London. Taylor, J., & Weerapana, A.(2011). Principles of Economics, Cengage learning, Mason. Watts, M.(2012). Market Economy, Retrieved March 13, 2013, from http://infousa.state.gov/economy/overview/mktec8.html. Read More