The Governments Role in a Market Economy - Coursework Example

Topic: Role of Government in a Market Economy Name: Lecturer: Course name: Course code: Date: The government’s role in a market economy Among many people, media pundits and politicians, there has been confusion concerning the way free markets operate. Capitalism is mostly used to depict this notion of free market. However, capitalism was used way back in 1776 by one of the supports of free market. Real market Capitalism should be separated from free markets. Capitalism comprises of social and political organization therefore it is evolutionary. According to economists, there are three pillars of any economic growth: self interest, division of labour and property rights. If property rights are implemented, it will ensure that people are willing to trade their goods and services at any positive prices (Sills & Abt, 2003). In any market transaction, what brings buyers and sellers come together is the interest of sellers to make a lot of profits and buyers want to obtain products at the lowest price possible. In any competitive market, self interest utilizes the economic welfare in the society. There will be proper allocation of products among the consumers if there is a free and competitive market. When there is a market failure, there has to be several laws and regulations that must be followed so as to safeguard the economy and this is where the government comes in as a market regulator (Kates, 2011) Government role in a market economy The role of the government in the market place is not to have control over everything in the market economy but to improve the way market economy is functioning. Therefore there should be a balance between the costs of regulating the market and the benefits derived from it. Some of the reason the government play a role in the market includes: Protection of public good National defense is one of the indispensable roles of government in the market. This is because the defense of any country is totally different from other goods and services where people pay for every piece of unite they consume. The govern purchases defense in totality for the nation at large. The role of the government in the market place is to make some improvements on the functioning of markets. This type of public good services cannot be left in the hands of the private business because no private business could be able to sell the defense services to the entire nation and still remain to operate in business. Public goods can also include provision of pests and flood and pests control program and also provision of radio and TV signals where all these products can be consumed by many people at the same time and many a times they are subjects to free rider challenges (Kopelas, 2011). Pollution and external costs The government plays a critical role in reducing the level of pollution being emitted into the environment. It makes laws and regulations to be followed so as to establish a tolerable level of pollution. The government comes up with fines, regulations, jail sentences and even some special taxes that reduce the level of pollution. The government can further come up with clear rights of ownership for the polluted resources will assist in ascertaining the market price of to be charged for the use of the resources and come up the identified rates to be charged on those using those resources. The government’s role here is to reduce overconsumption and overproduction of goods and services that may increase some external costs (Sachs, 2010). Provision of education and external benefits Education offers some external benefits to every nation that invests in it. This is because educated people are more productive and flexible and there are fewer chances that educated people will not be employed. By spending more in education today, it reduces both private and public spending in fighting social ills like crime, poverty and other social malpractices therefore increasing flexibility and productivity of the labour force (Lonkila, 2010). When a product generates an external benefit, the government may consider subsidizing or in other words encouraging its production, consumption or both of the two, so as to include the value of the benefit in the market price and level of output of these commodities. The larger part of government expenditure goes to public education in support of services that have external benefits. In rare occasions, the government sets prices for whether through taxes or subsidies so as to encourage external benefits. Provision of legal and social framework In the market economies, the government has to establish and provide protection rights to private properties and all the economic gains derived by using the product. Without the government providing such assurances, few businessmen will risk their time and resources investing in enterprises whose rewards and benefits will go to state. Protection any the government to private property extends to factories, and stores but extend also to intellectual property i.e. peoples property in their minds expressed through books. The government can build social environment by enforcing property right and having a legal system well maintained so as to build an enabling environment for goods and services to effectively function and with the full support from the government (Sills & Abt, 2003). Regulation of competition Government agencies ensure that there is a proper regulation of prices and services of companies competing in natural monopolies. When one industry is dominated by big firms which are few in the industry, there is a danger that the big firms may collaborate to increase the prices and reduce the level of competition by limiting the entry of new businesses. In order to curb and prohibit such behaviors and maintain healthy competition, antitrust laws have been created in most market economies. In some industries like aviation, there may be limited competition because of the level of demand can only support large companies. There should be a policy which will decide the competition between the small companies and large ones whose line of production is the same. Instead of reducing the competition, most of the government regulations and antitrust regulations increase e.g. taxes, quotas that limit importation of certain commodities, exclusive licenses to produce a service or a good and fees for skilled and professional workers. The potential costs of allowing the entry of big firms into the market and achieving monopoly is very high and this justify the fact that the government has a minimal role in coming up with roles that try to regulate competition(Lonkila, 2010). Involvement in income and social welfare Occasionally, some people are ill skilled on how to a living in the market economy. Others may have enjoyed the inherited privileges and natural gifts, from enterprises and even from other links from the family ties and friends. The government involvement in the market economy cannot be avoided as it takes part in the programs that disburse income with the aim of generating tax policies and ensuring fair distribution of income tax. Although there has been strong reaction on the governments screening on amount of wealth to be accumulated, there is need to maintain healthy competition and expound the diffusion of resources and power as stipulated by laws. Reason why there can be no free market economy  Free economy can never exist in the world today. Some other sectors in economy can never be left in the free market. Some other services can never be left into the hands of the private business owners therefore the government has to come up with regulations to ensure that these services are fair charged(Lonkila, 2010). In such sectors like security, the free market cannot determine the services to be given to the public. Security is a sensitive issue that cannot be left in the hands of the public therefore the government has to come in so as to regulate the sector. Furthermore, government’s absence in the market encourages unhealthy competition. Prices in the market are always determined by the forces of demand and supply. If this is not checked, the consumers are going to be exploited by the brokers in the market (Sills, & Abt, 2003) When it comes to supply of energy, the government has to come up with ways of controlling it. In most of the countries, there is a monopoly in the supply of power therefore there is no free market in the supply of energy. In conclusion, markets cannot go unchecked by the government therefore free market is almost impossible to be achieved Bibliography Åslund, A. (2009). How Ukraine Became a Market Economy and Democracy. Peterson Institute. Kates, S. ( 2011). Free Market Economics: An Introduction for the General Reader. London: Edward Elgar Publishing. Kopelas, G. (2011). Society in a Market Economy. NY: AuthorHouse, . Lonkila, M. (2010). Networks in the Russian Market Economy. NY: Palgrave Macmillan. Sachs, J. (2010). Poland's Jump to the Market Economy. Pol: MIT Press. Sills, E. O., & Abt, K. L. (2003). Forests in a Market Economy. Springer. Read More