Free Market Policies - Assignment Example

Economics EssayIntroduction:In the book Naked Economics by Charles Wheelan, economics concepts are discussed and connected it to the real world. The concept of externalities, free market and government are discussed in this paper according to Wheelan’s book, externalities occurs when demand and supply curves fail to record all costs and benefits and therefore efficient allocation of resources may not be realized, there exist two types of externalities positive and negative externalities.Free market exists when there is free entry and exit by firms into the industry, and under government we will discuss the fiscal policies used by government including taxation and government spending.

Naked economics:In the book naked economics by Wheelan he discusses externalities and he concludes that externalities cannot be solved because the market is the problem. Externalities can be defined and those costs and benefits that occur and are not accounted for by the demand and supply curves. There exist two types of externalities, positive externalities that are the unpaid for benefits while the negative externalities are the extra costs incurred, both of this will cause market failure which will lead to inefficient resource allocation.

Many economists have argued that this can be solved through government interventions through taxation and spending but to Wheelan they can be solved by market participants.(Wheelan C (2002) page 44)The concept of free market is also discussed in this book, when a market is said to be a free market it means that there is free entry and exit by firms into an industry, there are no monopoly or oligopoly tendencies or any government interventions. The supply and demand in this kind of markets determines the price level of products; Wheelan argues that government interventions destroy the working of the market.

He argues that the market economy is a powerful force for making our lives better and that government interventions are obstacles to higher standards of living. (Wheelan C (2002) page 18)Monetary and fiscal policies are used by the government so as to realize economic growth. Monetary policies include the use of interest rates and money supply, incase of inflation the government will increase the interest rates. Fiscal policies include government spending and expenditure, an expansionary fiscal policy is characterized by increased government spending which as a result increase the level of output by the economy, the government will use either fiscal policies and monetary policies incase depending on the inflation level, if the level of inflation is high the government will use a contractionary monetary policy.

Conclusion:Market externalities will cause inefficient allocation of resources and therefore the true scarcity value of the resource is not realized and this will lead to wastage of resources, the government has to intervene through the use of fiscal policies in order to steer the economy in the right direction, the suggested solution is leaving the market participants to solve the problem of externalities. The government should encourage free markets to ensure efficient use of resources, the demand and supply should be the driving force in the decision of price levels.

Fiscal policies and monetary policies are used by governments to aid incase of a recession that lead to a depression; the two policies are used depending on the level of inflation in an economy.Reference:Wheelan C (2002) Naked Economics; undressing the dismal science, W.W. Norton publishers, New York