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Government involvement in the economy
Market failure effects
Roles of government in business
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What extent of government regulation allows the citizens of the country the maximum amount of liberty? How much should the government intervene to protect the consumer? These are questions that every society must answer when developing their economic system. And for each question there are multiple answers. Some believe that little to no regulation is necessary, that the market place has natural laws of its own. Others disagree, saying that it is the government's duty to protect the individual from the evils of the free market. Both solutions have definite attributes.
The government intervenes the market to correct serious market failures. A market is defined as an organization that allows buyers and sellers to exchange goods or services. A market should be able to allocate the resources efficiently with competition in both sellers and consumers and consists of choices and quality. It should maximize the satisfactions of both consumers and sellers. But markets may create inequality of opportunity, which the disadvantaged groups are usually lack of skills to work and knowledge and promotes inequality of income. A market may also provide collective goods and services inadequately since the main goal of producers is a self-interest wish for a relatively high profit. Consumers are not protected from production faults in a free market. The market mechanism doesn't take into account externalities associated with an economic activity such as pollutions and monopolists may appear and manipulates the market to suits its own intents.
Without the government intervention, the problems above will occur. The government intervenes to ensure the adequate provision of goods and services, which the market may not provide if left alone to its own operation. Government intervention is intended to address market failure and market power. The government can influence the types of products produced through their health and safety laws, regulations, anti-pollution laws, subsidies and tariffs. It can also influence the methods of production of goods and services through the infrastructure it provides through the level of taxes and interest rates.
Government intervention is aimed to promote and ensure efficiency of the market. If the price rises above the cost of the good or service this will decrease the amount of the good or service consumers are able to purchase. The government intervenes with regulations such as price controls and taxation to redistribute the higher than normal profits.
One may think that economics is a complicated subject that should be studied and controlled by professionals. Government has been involved in making laws and regulations that affect economic principles. Three areas that can be strongly influenced by government controls are machine and technology advancement, rent controls, and minimum wage laws.
Governments regulate businesses when market failure seems to arise and occur and to control natural monopolies, control negative externalities, and to achieve social goals among other reasons. Setting government regulations on natural monopolies is important because if not regulated, then these natural monopolies could restrict output and raise prices for consumers. It is important to regulate natural monopolies because they don’t have any competition to drive down the price of the product they are selling. Therefore, with no competition, they can control the output and the price of the product at whatever they deem necessary. With regulations the government keeps it fair both for the consumer and producer. It’s also important for government
Debra Satz, in “Why Some Things Should Not Be for Sale”, argues for a more complex approach in market regulation, as some markets are more problematic than others. While economists tend to evaluate exchanges based only on proficiency (Satz 2010, p2), Satz considers the social context of individual practices in market relationships. In Staz proposed theory, there are four parameters of a market that can make it “noxious”. Noxious in this case meaning the effect of the market causes harmful consequences on society or persons involved. First, some markets may be reliant on the vulnerability of one party to trade. Second, some markets may have exceedingly bad consequences, in terms of welfare or status, for persons involved. Third, some markets may be one-sidedness because of insufficient information, knowledge, or ability to understand or forecast the consequences of an arrangement. Fourth, some markets may have bad consequences for society at large when they reinforce discrimination or inequality of status. For example markets that are considered noxious due to one or more parameters being present in their sale are child labor, prostitution and kidney exchange.
This paper aims to provides a full understanding of the free market system and how it can potentially benefit individual’s needs. The free market system is fully explained and classical economist’s views are considered separately as well as in contrast with one another. The specific economists discussed include Ricardo, Marx, and Mill. Their individual opinions on how the free market system could impact the economy is examined and the effects of an economic system controlled by the government is also discussed.
I think government should have a limited role in the economy, it should regulate it just enough to keep it stable. In laissez faire big business is basically allowed to do whatever it wants, short of murder without any legal ramifications. If big businesses are allowed to grow unrestrained they will most likely do so until monopolies are the only form of business left. If this happens there is nothing to stop these monopolies from taking advantage of the consumers who in the end would end up having no choice but to s...
“the exercise of that authority is curbed and shaped by the concern of government officials for its possible adverse effects of business, since adverse effects can cause unemployment and other consequences that government officials are unwilling to accept. In other areas of public policy, the authority of government is again curbed and shaped by concern for possible adverse effects of business” (Lindblom page 178).
The first thing that I noticed government effects in my day is the milk that I drink. Milk is a very easily spoiled liquid that must be pasteurized and kept cool so that the consumer will receive a quality and safe product. The government sets standards for dairy farmers as to what kind of feed and hormones they can give their cattle so that the will produce healthy milk for public consumption. The government also inspects the pasteurization process and the distributing of the milk so that the consumer receives a fresh and safe product.
One of the major areas in which the government intervenes is in the agricultural sector of the economy. The government has three ways it can intervene and help its producers. These ways include price policies, direct payments, and input policies. Price policies have the largest effect on producers. Tariffs, quotas, and taxes are just a few examples of price policies. While these policies bring revenue into the government, in the end they hurt consumers. Each of these policies raise the prices of both imported and native goods. They are designed to help stabilize prices and give the native producers a chance to compete with foreign goods. Under the doctrine of laissez-faire, the government would not interfere with prices and the native producers would be forced to lower their prices, giving the nation's citizens a better deal in the market.
The main objective of this essay is to understand how market society emerged, but first the defintion and characteristics of a market society must be understood. According to Polanyi, “Market economy implies a self-regulating system of markets.... it is an economy directed by market prices and nothing but market prices”(Polanyi 43). Similarily, Heilbroner explains how the market “allows society to ensure its own provisioning”(Heilbroner 12). Both of these explanations describe how the market economy is self regulated, meaning that this “economic system is controlled, regulated and directed by markets alone...
This view implies that governments intervene for many reasons, including the redistributional and stablisation functions. While market failure is one reason for intervention, other considerations, including questions of equity and social justice determined the nature and the extent of government intervention. This point was expanded upon by Groenewegen (1990,2) who argued that the extent of market intervention in the supply, distribution and redistibution of goods and services are not dictated by purly political and ideological considerations, other considerations may play a role including the failure of the market in certain instances to ensure efficient, equiable allocation of resources.
In micro-economics market failure is characterized by resource misallocation and subsequent Pareto inefficiency. Just as the invisible hand falters, so is the case that the unregulated markets are incapable of solving all economic problems. In laissez-faire economy, market models mainly monopolistic, perfect competition and oligopoly are expected to efficiently allocate resources for the “welfare benefit” of the society. However individualistic and selfish private interests divert the public benefits thereby prompting government intervention to correct the imperfection which may lead to disastrous economic impact. Although corrective intervention policies by government may not necessarily address the underlying imperfection induced by private sector inefficiency, it still becomes a necessary remedy to benefit the wider public if private entities are not allocating efficiency. Furthermore, as the largest contributor of the Gross Domestic Product, poor and untimely corrective measures could signal the failure of both the private and public interests. Effectiveness of the policies and mechanisms designed by the state in market intervention are fundamental in correcting any perceived market failure. Intervention however does not guarantee effective remedies expected by the economy and could lead to deeper market failures if the regulations “crowd out” the private sector but is the viable approach to address market failure.
Over all the appropriate role of government has always been an argument discussing whether it is actually helping our economy or is the government gaining too much power over the markets. However the economy could not prosper without the actions imposed to assist in diffusing the power over the markets and regulating as well as enforcing the law in order for things to done in a beneficial way to both the consumers and the markets.
One of the ways that a government can display their power is with their ability to affect the flow of the economy. The government can manipulate interest, spending, money supply, and taxation in order to change or not change how a country operates. Due to the issue of the boom and bust cycle, the periods when a country is thriving and when they are in poor conditions, the two main ways a government can choose to run a country, keynesian and supply side
A market economy may therefore also be known as a free market economy. It is a type of economic system in which the trading and exchange of goods, services and information takes place. The phrase is normally applied to countries or management regions that follow this approach. It functions primarily depending upon the forces of the market, namely demand and supply. Every commodity allocates and distributes based on the principle of “price”. Generally, price of a commodity shoots up when its demand exceeds supply and when the reverse occurs.
In my opinion, the most important aspect is that government should consider the importance of the government macroeconomic objectives goals and which government should priority first. This will be an easier way for government to allocate the resources and help to focus the government macroeconomic objectives