Does Government Intervenes in Society - Essay Example

Throughout the of history, as seen in various parts of the world, Governments have increasingly tried to control Economic action through its policies, which include taxation, formation of minimum wage rates, and even using military force to conquer and rule markets – as in the case of the once Glorious British Empire and its commercial wing – The East India Company. (Landow). Two economic concepts are the most popularly used by countries worldwide: Capitalism and Communism. While Communism, advocates total control of the economy by the Government, Capitalism is the complete opposite, which is based on ‘Minimum Government Intervention’ (SAHO). In early American History, the Government refrained from controlling or intervening in the economy and accepted the “laissez-faire” doctrine or “survival of the fittest” ideology. The only government role was to maintain law and order. (U.S. Department of State). However, a gradual shift in this policy has been noticed since the turn of the 19th Century with the rising corruption in the Public Sector and to ensure fair competition in the marketplace. There was a lot of support on the theory of Keynesian macroeconomics, which led them to believe that the government should set goals and objectives for the economy as a whole. (Willamette Univ.). While it is important for the Government to partake in some economic activity directly such Taxation Policies, formulating and implementing rules or laws for fair trade and competition etc., and sometimes indirectly by monitoring economic activities through Economic institutions (e.g. Federal Bank deciding to increase or decrease Bank Rates); it becomes necessary for the economy to be given a free hand in order to flourish. Often, government fixes prices on goods on services or labor, such as minimum and maximum prices, which may lead to aberrations in the economy. There may be shortages in the market which may arise if the government fixes prices below the prevailing market rate. Ex. Public healthcare being provided free may lead to long waiting lines for treatments (Higson). Government fixing prices can lead to Surpluses as well, which may be the outcome of prices being fixed above the market rate. In such a case, the supply will be more than the demand. For example guaranteeing a farmer a higher price than the market price encourages over production and gives rise to wastage. Similarly, minimum wages tend to lead to unemployment in the economy especially for unskilled labor when the wage rate is set above the market equilibrium. (Higson). Minimum Wages were set in the US during the 1930s, to respond to the the effects of The Great Depression. It had led to a fall in production, declining prices, and unemployment. The National Industrial Recovery Act (NIRA) in 1933 tried to stop these by encouraging Trade Association formations and agreements to establish price floors and minimum wages. (SW College). While this policy generally receives public support, as many economists believe, such a policy tends to increase unemployment in the economy. (SW College). Many economists argue that a free market place is incapable of handling public goods and externalities on its own, and hence, requires the intervention of government. Some examples of public goods may be R&D, Environment protection and public health and welfare programs. (Cowen) Public goods have been described as non rivalrous consumption. Externalities can be defined as the action of one person affecting another person, whereby the relevant costs or benefits are not added to the market price. For example, a factory emitting pollutants do not have to pay to clean or correct. While many believe that Government intervention is needed to solve these problems, most people do not realize that markets tend to correct these problems in their own way. Ex: Privately built roads charge toll to the users which then pays off the costs incurred in building the roads. Firefighting equipment, this can be classified as public goods are generally sold at a price. (Cowen). Public Goods are generally tied to the purchase of private goods. For example, there are many public goods such as restrooms, benches etc. in a shopping mall. It is not practical to charge for these services directly. Hence, the shopping mall initially installs these services and is remunerated from the sales of private goods in the shopping mall. Often contracts are negotiated to solve the Externalities problem. For example, if the R&D activities benefit other firms in the same industry, firms may combine their resources and pay part of the expenses on R&D. The benefits too are shared hence. This is referred to as externalities being internalized. (Cowen). Some may argue that this may be an imperfect situation to deal with public goods and externalities problems being solved without the intervention of government. However, we must consider the imperfections in Government policies in this regard as well and compare it to the solutions emerging from a free market place. Governments tend to be involved in bureaucracy, which has little motivation to serve customers. They often prove to be inefficient. Moreover, politicians tend to supply public goods to support. Hence, the argument that private solutions to these problems are often more efficient and effective than Government intervention. An Opportunity cost is the cost of forgoing one alternative by choosing another. In the amount of resources a government spends on intervening in a free market, it can be argued that it can spend its resources more effectively elsewhere. For example, government spending on public goods leads to greater bureaucracy, which has its own costs. Often, incentives are provided to companies favored by the Government. In such a case, it affects other companies who may not get the same incentives and this leads to less development in the quality of goods and services. In a scenario where government incentives and subsidies do not exist, the manufacturers have to constantly improve and develop the nature of their goods and services. This also leads to a healthy competition in the society, which results in better prices and more options for the consumer. Most decisions taken either by businesses or governments have trade-offs. Trade off is a compromise that results in choosing one alternative over the other. Generally, monopolies charge higher prices to the consumers and lessen supply. However, a monopoly has the motivation to innovate and develop new technologies and lower costs as well. Hence, in high innovation industries such as IT and Pharmaceutical, the role of anti-trust laws helps protection of the goods and services through patents. In the course of this essay, we have examined the role of the Government in the economy. We must also consider some positive outcomes of government intervention and balance it with the negative results to get a better picture. In an uncontrolled market, there would be little or no spending on law and order and defense as there would be no monetary benefit to the providers of such services. Hence, it becomes mandatory for Government to invest in these goods through taxation policies. Moreover, negative externalities occur in production. If it is not checked by the government, it may lead to economic and social damage. For example, in order to maximize its profits, a company may choose to use lower cost resources, like coal which damage the environment. By introducing taxes on environmental protection, the government can check the damage caused on the environment to provide a social benefit. Government regulations on monopoly restrict monopolistic behavior in the economy. A monopolistic market would drive up costs of a certain good or service if there is only supplier. The role of the government is needed in times of recession in the economy. During recession there may be a sharp decline in private spending and investments, and hence a fall in economic growth. In times like these, the government can increase public spending and utilize resources which are not being used. However, counter arguments to government intervention suggest that government spending leads to increase in bureaucracy and inefficiency. Government sector industries have little motivation for profit maximization and often prove to be inefficient. A politician is not an economist, he may not possess the skills required to optimally utilize market resources. (Pettinger). Economic theorists believe that government intervention has little effect on controlling the length of recession; it merely leads to an increase of public debt. There is an absence of any clear model that may reveal the benefits of government intervention or vice-versa. While in some cases it becomes necessary for the Government to intervene and exercise its authority and control the economy, at other times, it is advocated that the economy be let free. America has been successful due to its Capitalism and Lassiez-Faire Economy model. While the models of communism have greatly failed and become obsolete around the world in the wake of Globalization and technological advancement, America has flourished. It is the free market that has helped become America a superpower. Hence, I believe that Government intervention should be kept at a minimum regarding its influence on the economy. References Cowen, Tyler. Public Goods and Externalities. 2002. 21 March 2014 . Higson, George. Markets and Market Failures. Economics Online, n.d. Landow, George P. The British East India Company — the Company that Owned a Nation (or Two). n.d. 21 March 2014 . Pettinger, Tejvan. Should the government intervene in the economy? 24 Sept 2012. 21 March 2014 . SAHO. Differences between Capitalism & Communism and why did it start in Russia? 2003. 21 March 2014 . SW College. Policy Debate: Does an increase in the minimum wage result in a higher unemployment rate? 2003. 22 March 2014 . U.S. Department of State. Growth of Government Intervention in the Economy. n.d. . Willamette Univ. PUBLIC ECONOMICS AND PUBLIC ADMINISTRATION. 21 March 2014 . . Read More