Governments Role in a Market Economy - Essay Example

Running Head: Government’s role in a market economy Government’s role in a market economy and the reason why there can never be a truly “free-market” economy. Customer’s Name: Customer’s Course: Tutor’s Name: 19th March, 2012. Introduction A market economy or system is the structure at which market resources are allocated or regulated in the market. There are three types of market economy each with a different method of resource allocation. A free economy, a planned economy and a mixed economy are the three types of market systems. A free economy is a market system where resource allocation are solely influenced by the market forces; demand and supply forces. A planned economy also known as Governed or a command economy is where by resource allocation is set by the government while a mixed economy is a combination of both free and planned market systems (Taylor & Weerapana, 2007). The government intervention in a market economy therefore suggests a mixed economy where both market forces and government policies influence the allocation of resources. Therefore, the government intervention in a market economy is justified under the demerits of a free economy which explains the reason as to why a free market economy can never truly exist. Body A free market economy also known as a capitalistic or the laissez faire economy solely uses the market forces of demand and supply in the allocation of resources. The system sets the resources allocation by matching the levels of demand with that of supply to develop a stable point called the point of equilibrium. This where the quantity that buyers are willing and able to buy a product at a particular price and at a particular period (demand) matches with the quantity that sellers are willing and able to supply to the market at a particular prices in a particular period (Taylor & Weerapana, 2007). The equilibrium point gives the equilibrium price and the equilibrium quantity as shown in the diagram below. Supply curve Equilibrium price Equilibrium point Demand curve Equilibrium Quantity The systems allow free entry and exit that encourages competition and enhances consumer sovereignty due to availability of a variety of products (Taylor & Weerapana, 2007). However, the system exhibits some demerits that encourage or calls for government intervention in the economy. The demerits or the disadvantages are displays the role of the government in an economy. On the other hand, a planned economy also known as a command economy is where allocation and distribution of resources in an economy are regulated by the government (Taylor & Weerapana, 2007). However, extreme or sole government regulations do not perform well and therefore most economies tries to assume a mixed economy where the government’s main role in the economy is to ensure effectiveness and efficiency in the economy operation. One of the major roles of the government is the protective policy. It intervenes in an economy in order to protect the consumers as well protecting the local infant industry from collapsing. In regard to consumer protection, the government controls the production and supply of harmful products in the economy. The government uses various methods in then consumer protection. For instance, the government either bans such products from the economy or uses the tariff mechanism among other methods. The tariff mechanism is where the government imposes high excise duties or custom duties to hike the prices of the harmful products such as tobacco products. On the other hand the government can set price floors where certain such harmful products should price should not fall below. The price floor is usually above the equilibrium point showing the minimum price that such products should be priced (Taylor & Weerapana, 2007). On the other hand, the government uses price ceilings on essential products such that sellers or suppliers should not price the essential products beyond the price ceiling. Consequently, the price ceiling is below the equilibrium point showing the maximum price that the commodities should be priced. The diagram below shows the price ceiling and the price floor. Supply curve Price floor Equilibrium price Equilibrium point Price ceiling Demand curve Equilibrium Quantity : The price floor and the price ceiling. In addition to price ceilings, the government performs an important role in the economy by offering subsidies and quotas in production of essential goods and services. This is complemented with tax holidays and tax abolishment in certain industry or production sector therefore minimizing the cost of production and which results to low prices of the products (Taylor & Weerapana, 2007). S2 S1 EP2 Equilibrium point 2 EP1 Equilibrium point 1 D2 D1 EQ2 EQ1 : The effect of tariffs on harmful products. (Taylor & Weerapana, 2007) The diagram above shows the effects of the high tariffs on harmful products as changing the equilibrium point of the products therefore shifting the demand and the supply curve which shows a limited demand as well as the supply. The same mechanisms is used by are used by the government to protects its infant industries from hostile external competition. The competitive products prices are hiked creating a competitive advantage for the local industries’ production. In connection with consumer protection, the government has a role in protecting consumers from monopoly powers and exploitation where else a free market economy would not be able to protect. A free market enhances development of monopoly powers to private investors who exploit consumers in pricing as well as availability. The government regulates such activities and may at times especially in essential goods indulge in their production and supply (Taylor & Weerapana, 2007). The government also plays an important role in the economy in offering essential goods and services in areas where private investors would not be willing to. For instance, private investors evade places of low income generation. Concurrently, the government plays another important role in providing essential goods and services that require high capital which private investors would not be able to attain or considers the business too risky to invest in (Taylor & Weerapana, 2007). The government also has a role in the economy in offering sensitive essential services that are too risky to be left in the hands of private investors. These services include security, defense, education, health and infrastructure among other services. Fair distribution of income and wealth in the economy is another important role of the government in the economy. This bridges the gap between the rich of the poor. This is done through government owned or initiated projects in areas of low incomes that consequently attract private investors. Concurrently, the government offers employment to the general public through its projects providing income to the unemployed consequently raising their living standards. Producer protection goes hand in hand with fair income and wealth distribution (Taylor & Weerapana, 2007). The government partake this role through protecting income stability in various sectors of the economy. For instance, the government markets farmers’ products and engage in bilateral and multilateral agreements which facilitate extended markets for the local goods as well as cheap importation of rare essential goods in the economy. Conclusion It is therefore evident that the government partake important roles in an economy. This is evidenced by the weight its actions which would not have been the case in a free market economy. The government protection policy is one of the important roles in an economy. The policy protects consumers from harmful products as well as local infant industries from hostile competition from importations. The government also facilitates availability of essential products in the economy through subsidies and quotas which decrease the cost of production which is reflected in low priced products (Taylor & Weerapana, 2007). Consequently, the government prohibits consumer exploitation by monopolies through price ceilings. Price floors by the government facilitate harmful products protection as well as income stability to certain sectors of the economy. In addition, the government offers sensitive services that would be risky to be left in the hands of private sectors. Concurrently, offering goods and services where private investors are unwilling to. Fair income and wealth distribution is attained through the government projects and improves the living standards of the citizens by offering employment. A free market economy would not truly exist since it attracts monopoly powers, excessive competition, harmful products and an insecure economy with consumer exploitation and unfair income distribution (Taylor & Weerapana, 2007). Reference Taylor J. & Weerapana A. (2007). Economics. Boston. South-Western college publishers. Read More