Governments Role in a Market Economy - Coursework Example

The gоvеrnmеnt’s rоlе in а market есоnоmy Insert Name Course, Class, Semester Institution Instructor Date Introduction Every single economy has different characteristics that define its fabric of existence. Some economies are free markets while others are regulated by the government of the day. Free economies imply that the theorem of demand and supply is fully in the play setting commodity prices. In addition, the propagators of the free economy model opine that, in a free market economy, there is no government intervention. On the other hand, there is the socialist market economy or a planned economy that is run by the government where the government agencies regulate and allocate resources (Vaile, 2004). In addition, the government regulates wages as well as prices and may even determine the responsibilities bestowed to individuals. Since time immemorial, the government has been in control, in various sectors of the economy but the degree of control varies in the socialist nations. For instance, in the liberal nations, the government only regulates the principal industries while, in other stringent nations, the government exercises extensive control on many spheres of the economy. A classical example of a planned economy is the Soviet Union. Though the economy collapsed in the mid 1980’s, some countries around the world for instance Cuba still exercise control in their economy. Finally, there are mixed economies (Taylor & Luckham, 2006). A mixed economic system combines both the free market and the planned economy. Many of the decision making roles are delegated to the market by individual participants while the government plays a certain role in the economy. The government plays a vital role in the allocation of resources ensuring that there is an equitable distribution of resources. An example of the mixed economy is the United States which is among the advanced nations around the World enforcing a mixed market economy (Kelton, 2006). The only pertinent question facing the mixed economy theorem is the fact that, there is no clear cut difference between private and public economic sectors. This paper seeks to illustrate whether the free market can exist in the real world without government intervention. Capitalism Capitalism is another name for a free market. However, there are varying degrees of freedom which imply that the government can exercise minimum or no intervention with regard to allocation of resources as well as the means of production. More often than not, the government seeks to intervene the free markets to correct the market disorders or failures and promote the social welfare. In addition, many capitalists states rely on the market forces to allocate resources while the government relies on the state owned facilities and agencies to accumulate capital. Ever since the end of Feudalism, capitalism has a predominant in the Western world. However, scholars opine that the contemporary economies declaring to capitalists are spearheading mixed economies as they are not ideally free markets (Ball, 1997). This is because; these economies have both state and privately owned enterprises. However, according to economic scholars, the capitalist economies should entirely rely on the forces of demand and supply. Rule of law In any market, regulatory frameworks come into play. This is because; it is almost impossible for mankind to live in harmony and cohesion in the absence of law. In line with thoughts, the free markets require regulation from an oversight authority seeking to ensure that exploitation tendencies cease from happening. The capitalist’s economies have to have government intervention although on a limited scale. The government agencies will be the oversight body providing regulations that will ensure the provision of a conducive market environment. In an instance, a market runs with no regulation this would amount to savages thus no economy would thrive without interference from an oversight body. Market failures On the other hand, there are some market distortions that cannot realign in the absence of the government’s authority. In the neoclassical welfare, market failure is a justification for government’s interference in the free economy. According to this justification theorem, it valuable to consider two prime assumptions; the first assumption illumines that the market is the default allocator of resources (Shepsle & Barry, 1984). Further, the assumption derives a perfect competition scenario where the free and simultaneous information will enhance correction of market distortions. However, the second assumption asserts that, in the instance of imperfect markets, the government should correct the market failures. This assumption arises from the fact that, there is a dire need in society for the scarce resources (Munakata, 2006). However, in the eventuality of a market disorder, information does not flow smoothly given the imperfections prevalent in the market thus the government needs to intervene. The difficulty emanating from this approach is the fact that there exist two contradictory assumptions both revolving around capacity and human motivation? This is because; the corporation’s heads deny prompt information while the political elite is the executors of the public trust. On the other hand, the public who are largely the consumers lack relevant information. This implies that the prevalent government inconsistencies undermine the allocation of resources process. It is inherent that there could be market problems as well as government problems. However, it is indisputable that these two problems cannot be addressed under the same metrics. These two problems are related but should be addressed separately to ensure that there is an appropriate solution mitigating all the expected eventualities (Shepsle, 1986). It is beneficial to desist from classifying the problems in outmost isolation. This is because; the inherent failures arise as a result of mechanism failure and hence neither the political nor the economic doctrine should bear the blunt fully. It is worth noting that given the market failures prevalent in all economies, the free market scenario is not achievable (Lloyd, 2002). Trade agreements in the international scene It is apparent that no economy can survive in isolation. This implies that economies have to interact and facilitate trade agreements to ensure success of all participants (Krauss, 2003). It would be detrimental if the individual participants in a country where to interact freely with the citizens of another country and engage in separate trade agreements. The capitalist economies opine that, there is an economy that can exist without clear trade pact between nations to avoid certain repurcations such as double taxation. In such an instance, the government of the day meets with like minded governments to strike deals seeking to protect their own interests and foster the growth of domestic countries. This depicts that the government’s interference is inevitable, and the capitalist market theory does not hold (Leaver, 2002). The government’s input is tremendously powerful as it supports growth of the local markets through blocking some imports. The government also devalues or appreciates the country’s currency in its favor to ensure that the business fraternity has an upper edge in the global marketplace. These are stunts that the forces of demand and supply cannot withstand hence government interference is an undeniable contribution to the economy. Focusing on the international scene, various regions or countries achieve commendable milestones due to the trade agreements or treaties signed by their respective governments on their behalf. In the instance, the government input is withdrawn the consequence would be evident as the economy would crumble (Lee, Jong-Wha & Park, 2005). Distribution of income The general income of a country’s populace will determine the level of per capita income and hence will dictate the standards of living. In the instance of a free market or a capitalist economy, there will be an exaggerated gap between the poor and the rich. This is because; in the case where there is no regulation as pertains salaries and wages, the rich will continue thriving as the poor succumb to poverty. Income distribution is an eminent factor or indicator to the overall direction of the economy’s performance. This is, therefore, another legitimate reason for government’s interference in an economy. However, depending upon the people in power, this could be a venture for the people in power to enrich themselves (Wesley, 2007). The government enacts regulations of salaries and wages under which all employees should conform. Through salary floors and ceilings income redistribution will be possible and hence the entire economy will grow unanimously. This implies that people will change in real time to avoid the adverse consequences as well as to safeguard their interests in the public domain. In addition, the government through the progressive tax policies seeks to redistribute income. This is because; the government uses the revenue collected from tax to compensate the unemployed through food stamps (Ravenhill, 2001). The objective of income redistribution is to ensure that the economy is stable and hence the standards of living are rightly in place. It is hence justifiable that the government should intervene in certain matters pertaining the economy’s overall well being (Asian Development Bank, 2006). Induced intervention There are some economical policies that do not have any justification hence when such policies are enacted; they will amount to detrimental repurcations. This will result to another policy formulation to streamline the prior policies that were illegitimate and hence distorted. It is vital to evaluate the motive behind the government’s intervention on the economy. The only solution to this problem is to evaluate the factors inclining a government before it intervenes (Kelly, 2006). Conclusion It is apparent that there are a number of economies perpetrated by countries around the world. They include; free markets, planned economies and mixed economies. However, it is evident that the free market or capitalist economies are only possible theoretically. This is because; the paper clearly illumines that there are justifiable reasons for government’s intervention. The government perpetrates certain theorems in the economy because it has the responsibility to restore the sanctity in the economy. The economy would not thrive or excel if the government is out of the picture. The government has a fundamental impact on the overall economy and hence its role cannot be negated. Capitalist economies only exist on theoretical platforms but in reality, only controlled, and mixed economies can operate. This is because; government’s intervention is irreparable and only the degree of freedom matters. References Kelly. P, (2006) ‘Warming up to Tokyo’, The Australian, 12 August. Kelton. M, (2006). ‘US political economy in East Asia’, paper presented to the Second Oceanic Conference on International Studies, University of Melbourne. Krauss. S, (2003). ‘The US, Japan and trade liberalization: from bilateralism to regional multilateralism to regionalism+’, The Pacific Review 16(3): 307–29. Leaver. R, (2002) ‘Australian trade policy: the return of imperial preference?’, paper given at the Centre for Public Policy, University of Melbourne. Lee, Jong-Wha and Park, Innwon (2005) ‘Free trade areas in East Asia: discriminatory or non-discriminatory?’, World Economy 28(1): 21–48. Lloyd, Peter J. (2002) ‘New bilateralism in the Asia-Pacific’, World Economy 25(9): 1279–96. Munakata, N. (2006) Transforming East Asia: The Evolution of Regional Economic Integration, Washington, DC: Brookings Institution. Taylor, B. & Luckham, B. (2006) ‘Economics and security’, in Robert Vaile, M. (2004). Speech to the National Press Club, Canberra. Wesley, M. (2007). ‘Howard’s North Asian dilemma’, Brisbane Courier Mail. Asian Development Bank. (2006). Asian Development Outlook 2006, Manila: Asian Development Bank. Ball, D. (1997). ‘The benefits of APEC for security cooperation in the Asia- Pacific region’, in Susan L. Shirk and Christopher Twomey (eds) Power and Prosperity: Economics and Security Linkages in the Asia-Pacific, New Brunswick, NJ: Transaction Publishers, pp. 35–56. Shepsle, K. A. (1986). “Institutional equilibrium and equilibrium institutions.” Political science: the science of politics. H. Weisenberg. New York, Agathon Press. Shepsle, K. & Barry W. (1984). “Political Solutions to Market Problems.” American Political Science Review, 78: 417-434. Read More