The paper "Role of Government in Free Market Economy " is a great example of macro and microeconomics coursework. Throughout the history of the world, each and every community in one way or the other has been faced with fundamental problems that are related to the economy and in particular what should be produced and made available to the market and for whom in a world of scarcity. Throughout the 20th century, two main economic systems, have been witnessed. The command economy which is directed and controlled by the government and the market economy in which the demand and supply of goods and services in the market determine its own price.
In other words, in a market economy, the value of services and commodities is determined in a free market environment (Krugman 2003). However, in some situations, the mixed economy also does exist and the governments play a specific role. While market economies may be practical, it does depend on the fundamental principle where every player has room to exercise individual freedom. In other words, every person has the freedom to choose what to buy among different competing products and what to present to the market.
Further, the producer has the freedom to start and even expand his business without any kind of interference by the government. However, maintaining a pure market economy has remained a big challenge for many and that at a certain point, the government may interfere with the process to ensure that the process is not abused by private entrepreneurs (Barro 2002). It is in this respect that this essay intends to discuss two major aspects in relation to market economy namely: the role of government in a market economy and why there can never be a truly free market economy. Free market economy Definition: Market economy is described as the market where the prices of various services and commodities determine their supply and demand.
The value of services and goods is determined in free trade. Role of government in a free-market economy Many people in society today are confused about what should be the role of the government in a free market economy. This is to imply that there is a reason as to why a free economy exists.
It is referred so because the government should not in any way determine the path the economy should take. When the government does intrude or interfere with the free market economy, then it ceases to be called so. The role of the government in this kind of economy is to guarantee sanity and proper functioning of the business world over (Amadae 2003). The government, in particular, has the responsibility of ensuring that the market is operating smoothly and performing its functions as ought to be and this can be achieved by enacting and executing different policies as one way of guaranteeing individuals of their rights to own property and access important services.
At this point, the government is expected to strengthen its institutions to guarantee the security of private investment in a calmer political environment (Bernstein 2001). As noted by Adam Smith, property rights and self-interest as well as the division of labor, are key pillars of any economic growth. According to him, property rights for instance if well defined and executed can ensure that people have the freedom to transact services and commodities at good prices (Krehely and Kernan 2004).
On the other hand, the self-interest by the sellers to make certain profits and also the buyers to acquire certain products of their choice at the best prices is what brings both of them together in order to transact. In competitive markets, self-interest helps maximize the economic welfare of the community. “ If free markets free and competitive markets work, they efficiently allocated products among consumers according to their preferences, allocated inputs among producers, and enable producers to obtain the maximum output with given amounts of inputs while the division of labor helps facilitate the scale of economies to bring down costs” (Easterly, 2002).
However, important to note is that there are different situations where the markets play their role as ought to be in an efficient manner. In such a situation, the economists term it as “ market failure” a point many people obligated to enhance different virtues of the free market economy miss to point out. Market failure comes into being for a number of reasons and therefore prompting the need to have the government intervene (Ebeling 2010).
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