The paper "The Role of Government in a Market Economy" is a good example of a macro & microeconomics essay. A market economy refers to an economy whereby decisions relating to production, distribution and investment are made based on demand and supply (Dick, Blais & Moore 2007, p. 21). This implies that the choices regarding the allocation of resources are principally determined by the markets. However, the interests and the welfare of the whole society may not be considered because firms make decisions that maximize their economic well-being. This in turn makes the markets fail hence the need for government intervention.
Government involvement is thus vital in order to provide mechanisms necessary to ensure efficient operations in a market economy. The objective of this paper is to identify the role of government in a market economy. Additionally, the paper will show why there can never be a truly free-market economy. According to Merchant (2008, p. 120) government has the role of providing public goods in a market economy. This is because some goods and services like security cannot be provided adequately and sufficiently by the private sector.
Watts (2012) emphasizes that the role of government in providing public goods is obligatory because they are subject to the problem of free riding. This means that once a person produces public goods and services other people can potentially use them without paying for them. Dick, Blais & Moore (2007, p. 23) note that public goods suffer from the free-rider glitches because they can be consumed jointly. As a result, public goods may remain unproduced in an economy because firms can incur excessive costs in preventing non-payers from using these products.
The role of providing public goods is thus left to the government. This in turn explains why a true free-market economy cannot exist. Government has a role in stabilizing the economy through the use of both fiscal and monetary policies (Langran & Schnitzer, 2007, p. 35). In order to achieve stable economic growth, the government should actively participate in the economic market.
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Watts, M.(2012). Market Economy, Retrieved March 13, 2013, from http://infousa.state.gov/economy/overview/mktec8.html.