Governments Role in a Market Economy - Essay Example

Running Header: Essay Topic No. 3. Explain government’s role in a market economy. Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Essay Topic No. 3. Explain government’s role in a market economy. Markets play an important role in the economy; however they cannot operate independently because they have their own imperfections. Additionally, the increased competition as well as the emergent of new issues like privatization has increased flaws in the market. This has in turn increased the roles that governments play in the market economy. According to Khan (2010, p. 155), the indirect role of the government has increased in the market. This is in order to provide both social and legal framework for markets to operate perfectly. The framework provides the necessary laws and regulations that define the operating conditions and describes the form and status of various business establishments. The aim of this paper is to explain the role of the government in a market economy. It will also demonstrate why there can never be a truly free market economy. Governments have a role of providing legal structures in a market economy in order to ensure efficient and effective operations (Lopus, 2009, p. 29). The government must develop rules in order to make sure that property rights are observed and participants in the market economy enforce their contracts with each other. Khan (2010, p. 163) emphasizes that the government acts as a referee in a market economy by developing rules and imposing penalties for participants who engage in illegal dealings. Thus, a government plays an important role of furnishing the economy with means, legislations and regulations that ensure firms provide high quality products and enforce their contracts. Additionally, it provides rules that define ownership rights. Anderson (2010, p. 90) observes that the private sectors cannot be able to fully regulate themselves because their decisions are mainly based upon their individual gain. This makes it indispensable for a government to participate in the market so as to provide fair and equitable regulatory framework. This explains why there can never be a truly free market economy. Governments have a role in the market economy of maintain competition. According to Khan (2010, p. 159), competition is the efficient and ideal market mechanism that motivates resource suppliers and producers to react to consumer sovereignty and price signals. Thus, a government plays a fundamental role of providing and enforcing anti-monopoly laws which are aimed at promoting competition and regulating the behavior of businesses. Lopus (2009, p. 31) emphasizes that competition is essential in market economies because it leads to lower costs of production and prices. Accordingly, if businesses become monopolies they may lose the benefit associated with competition. Therefore, the government has a role of regulating some monopolies and preventing others from occurring. According to Rich and Enderle (2008, p. 637) fair competition can only be maintained through government regulation hence there can never be a truly free market economy. The economy requires a framework of order that obligates businesses to maintain fair competition and to prevent the development of market powers. This role can only be performed by the government thereby making it impossible for a true free market economy to exist. Government has a role of correcting and repairing failures in the market economy (Leach, 2008, p. 390). In some instances the quantities and prices of goods and services determined by forces of demand and supply in the market are not the most optimum for the society. This implies that when the decision regarding how much to produce is left entirely on businesses the markets may experience shortages in amounts of certain goods. Thus, the government has a role of filling the shortages left by firms. Taylor (2006, p. 15) observes that the market may fail to offer the required goods or fail to provide the correct amounts of certain services and goods. Furthermore, market failures may occur because of inefficient allocation of resources especially when property rights are not enforced or defined and when markets are uncompetitive. Therefore, the government plays an important role of ensuring efficient allocation of resources in order to ensure equilibrium hence correct failures in the market. Market failures can only be corrected by the government and this explains why there cannot be a truly free market economy. According to Taylor and Weerapana (2011, p. 33) governments have a role of redistributing income in its economy. This implies that a government should endeavor to provide social and welfare services to the dependent, unemployed and the poor. In order to do this, a government must transfer income from the high income earners to the low earners, through progressive tax programs. It can also redistribute income through subsidiaries and by providing low interest loans to small business owners. Lopus (2008, p. 31) notes that the government has a role of guaranteeing a minimum standard of living for its citizens. To accomplish this it must ensure efficient redistribution of income in its economy. The role of distributing income cannot be left to the markets because they do not have the necessary mechanisms hence the need for government intervention (Kates, 2011, p. 53). This attests why true free market economies cannot exist. A government has a role of promoting growth and stability in its market economy. According to Khan (2010, p. 164) a government should stimulate economic growth and stability by implementing changes in its monetary and fiscal policies. This implies that the government has a responsibility of spending the funds collected through taxes to develop and stabilize its economy. Lopus (2008, p. 31) emphasizes that a government should assume an active role so as to achieve steady economic growth and at the same time reduce the levels of inflation and unemployment. Thus, through taxation and speeding a government seeks to stabilize the economy by controlling the supply of money. This role cannot be efficiently performed by the markets because of the fact that they seek to maximize their own gains hence the need for government involvement. This in turn makes market economies not to be truly free. Rittenberg (2011, p. 376) states that a government has a role of providing public goods in a market economy. Public goods are those goods which are prohibitively expensive to provide. The challenge exhibited by public goods is that once they are produced they become freely available to everyone. This infers that once someone provides these goods, other people can use them without paying for them. Subsequently, if firms provide public goods they may not fully benefit from them due to the problem of free rider. This makes it necessary for the government to provide them hence the non-existence of a truly free market economy. Lopus (2008, p. 31) notes that public goods like national defense cannot be provided adequately by the private sector. This is because free riding behavior which is common in the market economy may make the production of this goods and services to be inadequate (Tucker, 2010, p. 458). Therefore, the government has an essential role of providing public goods. In conclusion, a government has a role of providing the necessary legal structures in a market economy in order to ensure well-organized operations. In addition, it has a responsibility of maintaining competition and repairing market failures. This is because competition leads to lower costs of production hence lower prices. Furthermore, the government has a role of redistributing income in its economy by transferring funds from the high income earners to the low income earners. Finally, promoting growth and stability as well as providing public goods are other roles that a government must perform in its market economy. These roles cannot be sufficiently performed by the private sector thereby calling for government participation. This makes the economic markets not to be truly free. References Anderson, D. (2010). Economics. Pearson Education Ltd, London. Kates, S.(2011). Market Economies, Edward Elgar Publishing, London. Khan, M.(2010). The Role of Government in the Economy, The American Journal of Social Sciences, vol. 14, no. 2, pp. 155-171. Leach, J.(2008). A Course in Public Economics, Cambridge University Press, Cambridge. Lopus, J.(2008). Economics in Action, National Council on Economic Education, New York. Rich, A., & Enderle , G.(2010). Business and Economics, Peeters Publishers, New York. Rittenberg, L.(2011). Principles of Microeconomics, Flat World Knowledge, London. Taylor, J. (2006). Principles of Macroeconomics, Cengage Learning, Mason. Taylor, J., & Weerapana, A.(2011). Principles of Economics, Cengage learning, Mason. Tucker, I.(2010). Microeconomics for Today, Cengage learning, Mason. Read More