What are the roles of government in the market economy? Based the current econom

Question

What are the roles of government in the market economy? Based the current economic conditions, to what extent should the government intervene in the market economy?

What are the justifications given in favor of more government involvement in the market economy? What are the reasons given in favor of less government involvement in the market economy?

Provide an example to discuss how special interests can succeed in perpetuating policies that are opposed by the majority of voters because the costs of organizing and motivating groups to take political action increase with group’s size.

Explanation / Answer

a. Market economy is a economy where supply and demand of the goods play an important role in a competitive market place. Government has a limited role to play in the market economy. The role of the government are-

1. Providing those goods and services which have high social priority but low profit margin like national defense, infrastructure like bridges, police, law and order etc.

2. It should make overall rules and regulations which are binding for the private sector.

3. Prevents concentration of monopoly power in few hands.

4. Stabilizing the economy when the economy is in recession.

5. Should make strict rules to reduce negative externalities.

b. Based on current economic conditions, the government should intervene to reduce unemployment rates in the economy. Though the unemployment rates have fallen, but have not fallen to initial level. Government to increase spending to increase aggregate demand in the economy which will lead to increase in overall output and income and thus increase employment levels.Government can provide incentives to private sector in this regard.

c. Arguments for government intervention-

1. Private players are profit maxi misers and thus will not be interested in provision of public good. So, government is the only player in providing public good as their concern is overall welfare and not profit maximization.

2. Controlling monopoly powers and preventing anti competitive practices. Thus regulation of private sector is done only by the government.

3. Taxing those who create negative externality to protect environment, pollution and subsidizing positive externalities. Thus, government ensures optimal social level of these externalities.

d. Arguments against-

Problem arises when the government starts micro managing the economy which hampers the autonomy of the private sector. This acts as a hindrance for the development of the private sector and negatively impacts overall productivity. Thus, government should regulate the market economy but not over regulate.

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