The Extent of Governments Interference in the Free Market - Coursework Example

Running header: the extent of government’s interference in the free market Student’s name: Instructor’s name: Subject code: Date of submission: Government’s role in the free market In a free market, it is the forces of demand and supply that controls the market. The government exercises little or no control on the market. Ideally, in a free market economy the buyers and sellers transact business freely based on mutual consent without government intervention by way of taxes, regulation and subsidies. However, in reality, a free market economy can not exist since there will always be state intervention through levying of taxes, control of prices and government restrictions that may keep competitors from entering the market. This paper seeks to analyze different arguments for and against government interference. Arguments for government interference include maintenance of law and order and provision of security while arguments against interference include reduction in profitability brought about by taxation (Murray, 2009). From the analysis, it will be argued that the government’s role in business should only be regulatory. This is because over interference with the operations of a free market greatly reduces profits and keeps some players out of business. Our constitution gives room for government’s intervention on the free market. The constitution however insists that that the intervention should be minimal. The constitution gives the government powers to regulate both national and international businesses within the country as well as powers to levy and spend the tax. It also grants the power to borrow and to promote the social welfare to the government. Government regulation of the free market is propagated by government agencies according to the laws passed by the parliament in an attempt to address the perceived market failure or attaining social goals. The government has the responsibility of setting legally enforceable laws for regulating business activities that are considered to be legal. Other government agencies such as municipalities set laws that govern the production, marketing and transportation of goods and services within their jurisdiction (Julio & Lawson, 2007). Government’s interference with free market forces people to behave in ways which are not in their best interests when carrying out their duties. Therefore, government’s regulation usually distorts the organization’s behavior and choices. In an ideal free market, buyers and sellers exchange goods freely without being coerced. However, regulation of free market compels people to transfer property rights directly to others. Therefore, the terms of exchange are coerced and against at least one of the participants in the exchange. The purpose of such regulation is aimed at making the government intervene and force an exchange that would otherwise not be agreed upon in the free market (Eliezer & Karras, 2008). A market failure is said to exist if the free market does not achieve its desired goals. In an ideal free market setting, public goods such as electricity and water would not be provided in an efficient manner. Government intervention would also be called for in order to collect the inability of the free market to provide certain values (Kevin, 2005). The free market has also been blamed for its inability to produce certain goods and services at costs or quantities that are rational and acceptable by the majority. Therefore, the government has to interfere by compelling firms to produce the goods or services at the desired prices and quantities. In general, government intervention should occur in the following circumstances; -when the firms or market structures are too few, the government can give incentives in order to raise the number and hence improve the people’s access to goods and services. -when there is a need for conservation and efficient use of natural resources, the government can intervene by issuing appropriate guidelines regarding their use. -when a firm’s activities are believed to cause serious negative economic externalities such as pollution, the government can interfere by enforcing the necessary environmental laws. -the government may interfere with the free market in order to prevent undesirable social conduct of a firm such as price discrimination. -the government may also interfere with the free market in order to control the location of major industries in the economy. This is done by issuing subsidies to developers who set up industries in certain areas. This is mainly aimed at ensuring balanced regional economic development (Edward, 2000). Social regulation is a relatively new type of regulation by the government on the free market economy. The main concern of social regulation is the impact of the firm on the people either as employees, customers or citizens. By this, the government aims at providing protection against discriminatory practices in employment; assuring workers of safe and healthy work places; protecting the consumer from the threat of unsafe products; and protecting the general public from being exposed to harmful environmental pollution (Jacobs, 2007). Social regulations are developed to guide business practices in all industries. For example, the government’s agency on environmental protection will set environmental reduction guidelines for all firms in the economy. The emergence of social regulation signaled an increase in government role in the affairs of a free market. Due to the power shift from firm managers to government regulating agencies, there is no clear distinction between public power and private power. However, the aim of social regulation is not to control entry, prices, profits or exit but it is to address market failures like externalities and lack of adequate information (The bare foot bum. 2008). The result of government’s interference with the operations of a free market is costs and undesirable consequences which are more harmful than the problems that the government target. Its activities are a great impediment to economic growth and prosperity. Government’s actions to regulate business lead to increased costs, slowed decision making and reduction in availability of resources with which to produce various goods and services (Robert &Poole, 2001). Unfortunately, it is the consumer who bears the greatest part of the cost in the long run. The most obvious effect of government regulation of a free market is the imposition of taxes with which to run and maintain the regulatory agencies. Then there are direct compliance costs such as paper processing costs, accounting and attorney’s fees, the cost of time lost by employees trying to understand and comply with the regulations etc. such costs are passed to the consumer as increased prices (Asociologist.word press.com. 2009). Increased regulation increases the cost of hiring workers (Jared, 2007). The government’s law on minimum wage and the several labor laws lead to increased cost of doing business and hence reduced employment. Government regulations on unemployment and disability insurance, retirement benefits and government paperwork requirements lead to additional costs to employers. This if not checked could lead to lay offs or reduction in the rates of job creation. Furthermore, government’s interference with the operations of a free market economy leads to loss of enterprises unable to meet the increased government regulations, reduction in development of new improved products and little or no rise in the standards of living (Barry, 2002). Increased government regulation also discourages foreign investors from investing in our country. Some local firms end up relocating their businesses to other countries where government interference is perceived to be low. Proponents of government interference argue that interference helps fight fraud. This might be true to some extent. All businesses are started with an aim of making profits. Government interference serves to increase the costs of doing business. Sometimes the conditions are hard or too expensive to meet. Consequently, firms are constantly involved in corruption in their bid to avoid regulation and hence increase their profits. Businesses also bribe so as to avoid closure of their businesses if government agencies discover that they have not fulfilled some of the regulations. Therefore, one can argue that elimination of corruption between various firms does not serve its purpose since it increases corruption between businesses and government agencies (Open salon.com. 2009). There is no doubt on whether the free market should be regularly controlled by the government. This will serve to ensure that contracts between firms are fulfilled. Government interference will also prevent the general public from being overexploited by the firms in the free market. Most of all, the government provides security to the firms hence creating a conducive environment for the firms to thrive in. however, too much interference cause more harm than good in the free market. Therefore, businesses should be given more freedom and the forces of demand and supply allowed to control the market as much as it is practically possible. Since the argument for a completely free market can not hold in the real world, government interference should be minimal and only regulatory (Richard, 2001). The government ought to act as the economy’s ‘referee’ by just ensuring a fair playing ground between the various stakeholders in the free market instead of being a major player in the market. Taxes should be kept to their minimum. Government spending should also be minimized. The government may assist in reforming some sectors like education and healthcare but this should not be a complete takeover. Any major interference in the market will lead to more and more frustrations to the firm owners. Therefore, the market will continue witnessing the application of illegal or quasi-illegal means of getting money in order to ensure survival. Major interference will only lead to weaker business sector and hence a weaker economy. References Julio, H. & Lawson, R. (2007). Handling Economic Freedom in Growth Regressions: Suggestions for Clarification. Econ Journal Watch, 4(1), 71–78. Eliezer, B. & Karras, G. (2008). Components of Economic Freedom and Growth. Journal of Developing Areas. 32(3), 327-338. Kevin, C. (2005). The iron fist behind the invisible hand: Corporate capitalism as a state- guaranteed system of privilege. Cambridge: Cambridge university press. The bare foot bum. (2008). Government interference. Retrieved April 30, 2010, from http://barefootbum.blogspot.com/2008/08/government-interference.html. Open salon.com. (2009). Government’s interference in the free market causes corruption. Retrieved April 30, 2010, from http://open.salon.com/blog/the_constitutionalist/2009/03/26/governments_interference_in free_market_causes_corruption. Asociologist.word press.com. (2009). Arguments for the free market. Retrieved April 30, 2010, from http://asociologist.wordpress.com/2009/09/25/four-arguments-for-the-free-market/ Edward, Y. (2000). Government regulation: economy of individualism. Retrieved April 30 2010, from http://www.quebecoislibre.org/younkins12.htm Richard, B. (2001). Airline Deregulation and Air Travel Safety. Washington: St. Louis University press. Barry, M. (2002). The political economy of regulation. New York: Columbia University Press. Robert, W. &Poole, J. (2001). Instead of regulation. Lexington, Mass: Lexington Books. Murray, L. (2009). Business and government. Upper Saddle River, N.J: Prentice Hall. Jared, G. (2007).The free market economy. Australian economic journal, 21(2), 33-56. Jacobs, B. (2007). Why do governments interfere with business? Economic affairs, 3(3), 13-35. Read More