Role of Government in Free Market Economy - Coursework Example

Free Market Economy Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction 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. They 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, 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 on 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 free market economy Many people in the society today are confused on 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 free economy exist. 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 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 the 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 division of labor helps facilitate 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 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). First and foremost, there is an element of monopoly power. In this kind of situation, there are always viewer sellers and producers in the market and the exercise excessive control of the market. The challenge in this kind of market situation, is that the producers tend to limit their outputs in order to change their prices above the competitive prices in the market. This is one major reason as to why the government has to play a very significant role in the free market environment by creating different policies to ensure trust. For instance, the Sherman Act of 1890 by the Federal government to stop practices that were antitrust and other anticompetitive business practices. Some of the essential commodities that can be highly monopolized and are very essential to the user include gas, electricity, oil, security, education and much more. The role of the government is therefore important in regulating and promoting the public interest (Barro 2002). In addition, in a free market economy, there is also an aspect of total cost where the producers do not bear the full cost of their production or do not enjoy all the benefits associated with their production. For instance, in Utah, the producers of oil and gas are not the only ones who bear the health hazards caused to the environment as a result of their production activities, instead the whole population residing around the Uintah and the Salt Lake valley. On the other hand, other activities related to basic research and development as well as education, are passed to those individuals who do not in any way contribute to the whole process of invention and other knowledge related production (Amadae 2003). Another good example is the sick people seeking attention in emergency clinics. This passes on the cost to the insured people. What all these cases imply, is that different government regulations on taxes and subsidies have to be enacted in order to improve efficiency. Further, with there is also an aspect of common property resource. Common property is nobody’s property and therefore can easily be misused. No single government does not have assets that can be referred as the common properties like market shades, stalls, land and many more. Realistic and life examples of common property resources include Great lakes, Amazon forest, Great Salt lake and Yellowstone National Park in Utah. These are important resources that can never be privatized and therefore the government will always be forced to intervene in the process of preserving them for the common good (McMillan 2002). Another important role of the government in the free market economy is to provide information and its general flow. For instance, the recent mortgage crisis experienced in the united states, is as a result of information asymmetry which had led to misinforming of the participants and in particular the borrowers. Heath insurance is also another area government presence is required in order participants to make informed decisions to avoid exploitation by different service providers (Mirowski and Sent, 2002). While some people may argue that the free market should exist on its own without the interference by the government, uncertainty remains one of the serious impediments especially for those services and products that can maximize the welfare of society. Take an example of the construction of energy transmission lines. This can be a very risky venture especially at the start hence the need to have government intervention to ensure safety among the users (Abelson and Lindquist 2002). Conclusion Free market economy exists where the supply and the demand of the products and services determines its own prices. This essay in particular has discussed the concept of free market economy and the role of government in it. While it's essential to have the free market economy operate independently, it has been established that, that will only be possible to a certain point because of a number reasons. This is because, according to Adam Smith, the free market is not likely to work in an efficient manner to promote the public welfare without the government examples. For example such as issues as safety and product quality are essential. On the same line, products like oil and gas are very critical to be completely left in the private hands. References Abelson, D. E., and Lindquist E. A. (2002). Think Tanks in North America. In Think Tanks and Civil Societies: Catalysts for Action, edited by J. G. McGann and R. K. Weaver. New Brunswick, N.J.: Transaction Press. Amadae, S. M. (2003). Rationalizing Capitalist Democracy. Chicago: University of Chicago Press. Barro, R. J. (2002). Nothing Is Sacred: Economic Ideas for the New Millennium. Cambridge, Mass: MIT Press. Bernstein, M. (2001). A Perilous Progress: Economists and the Public Purpose in Twentieth- Century America . Princeton: Princeton University Press. Easterly, W. (2002). The Elusive Quest for Growth: Economists’ Adventures and Mis- adventures in the Tropics. Cambridge, Mass.: MIT Press. Ebeling, R.M. (2010). Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition. London/New York: Routledge. Krehely, J. and Kernan. E. (2004). Axis of Ideology: Conservative Foundations and Public Policy. Washington, D.C.: National Committee for Responsible Philanthropy. Krugman, P. 2003. The Great Unravelling: From Boom to Bust in Three Scandalous Years . London: Allen Lane. McMillan, J. (2002). Reinventing the Bazaar: A Natural History of Markets. New York: Norton. Mirowski, O. and Sent, E.M. eds. (2002). Science Bought and Sold: Essays in the Economics of Science. Chicago: University of Chicago Press Read More