Role of Government in Market Economy - Essay Example

Running Head: Role of Government in Market Economy Role of Government in Market Economy Name Course Lecturer Date Role of Government in Market Economy In recent times, no area of economies has continued to experience abrupt changes as the marketing economy. These changes have increasingly had intense implications for the way the role of the state or government has been viewed by economists, development practitioners and the international organizations. Of importance, is that the role of the government in the market economy is not to take over the marketplace but to ensure that there is improvement in the functioning of the market economy. This means that any decision that is made to intervene or regulate in the play of market force should be carefully balance the benefits against the cost of any regulations that any intervenes will bring. It is also important to note that in a free market, a market whereby the prices are mainly controlled by the demand and supply, the government has little economic participation and is said to be basically a bystander whose main role is much of that of an umpire, to enforce rules and also resolve issues around the formulated rules. Therefore, the government is not responsible for the basic creation of the rules. Creation of legal structures One of the major roles of the government is in the creation of a legal structure in the market economy. Lack of this frame work or structure will lead to the collapse of the market economy. The market economies are not licensed for theft or exploitation inasmuch as it is prone to abuse. Of major concern is the little trading that takes place in a state or country when the basic legal rights of producers and consumers to trade and own economic resources are not recognized and well protected (Lane & Ersson, 2002).. This explains the reason the government does keep account of houses and lands and goes to an extent of enforcing contracts between sellers and buyers in all kinds of goods and services. The buyers and sellers need to have the assurance that the transaction of the services or goods is carried out is effective and genuine (Tanzi, 2011). This is also applied to the workers, either collectively or individually in unions, agreeing to working conditions and wages with their employers. If the assurances are not given effectively and routinely and if an impartial justice system which is fair is not in place, all the market dealings will eventually become difficult and expensive to complete. Protection of rights to private property In market economies, government should establish and aim at protecting the right to ownership of private property and the rights to the economic gains that are derived from the utilization of this property. Lack of this assurance, will allow only a few people to risks their money and time in enterprises whose benefits may possibly go to different group or the state. For example, when Maria and Robert were contemplating starting educational software, they had in mind the risk of economic failure; however, they also knew of the rewards they were to get if the laws that were protecting right to property were effective. Protection of private properties by the government does not only cover the factories, land, tangible goods and stores but also the intellectual property, that is, products of people minds which is expressed in writings, films, visual arts, engineering designs, computer software programs, scientific inventions and pharmaceuticals. Very few companies or entrepreneurs will take time and money to invest in the time-consuming and expensive research into computer programs, new drugs, for instance, if the rival companies will simply use and market their efforts without the slightest efforts to pay loyalties or even pay extra fee that will be reflected in the production costs. To encourage and protect artist and scientist, governments issue other exclusive rights, copyrights, aimed at protecting intellectual properties for instance films, books and computer software programs. These are also called patents that protect other types of designs, inventory manufacturing processes and products. In enforcing and defining property right and enhancing effective and efficient legal system, governments can also create a social environment that permits private markets for most services and goods to function efficiently and have a widespread support. Social welfare and income Government has a major role to play in the social welfare and income. In many countries, some people lack the basic skills needed and the required resources to make a living in the market economy. Therefore, the government should meet the cost of providing these skills. In market economies, the governments engage in those programs that redistribute income. The governments do so with intention of creating tax policies and post-tax distribution of resources and income fair. This role of the governments will definitely limit the concentration of riches and wealth and create a wider diffusion of market economic power in the states. In addition to redistribution of income, the government should strive to ensure that its role on provision of relief to the poor, unemployed and dependent handicapped. Medicare, welfare and social security programs are examples of several programs that the government should employ to support the elderly, sick and poor. These programs will assist in the transfer of income from higher earners to limited income groups that may be done through taxes. Other ways of redistributing include programs that support prices for instance, low interest on loans especially to students who are from low –income earners’ families and farm subsidy (Stonecash et. al., 2011). Fiscal and monetary policies In their policies, the governments play critical role in creating and providing economic conditions in which private enterprises in the marketplace can function effectively. Therefore, it has a major role in promoting stability and growth. This is made possible through fiscal and monetary policies. Monetary policies do signifies the basic use of money supply, reserve requirements and interest rates, for instance , while fiscal policies essentially means the use of spending and taxes by the government. The government is expected to provide a stable and widely expected currency that must eliminate the requirement of inefficient and cumbersome systems of barter trade. It is also expected that the value of the currency will be maintained through the policies that will limit inflation. Market economies have a long time been afflicted by seasons of swiftly rising price levels, increased levels of unemployment or with periods of both unemployment and increased rate of inflation (Dixon & O’Mahony, 2010). Fiscal policies do employ government tax programs and spending to assist in stimulating a country’s economy in times of low inflation and high unemployment. To stimulate the total levels of employment, production and spending, the government is expected to tax less and spend more even if it will incur a deficit. In order for the government to deal with issues concerning inflation in the market economy, it can increase the peoples’ incentives to save, produce and invest, eliminate all the bottlenecks of the key resources, increase the level of competition by reducing the power of monopoly. Most economies have continued to acknowledge the vital role the government is playing to fight inflation and unemployment with stabilized policies that include stable growth in the money supply, government’s programs that indeed rise when the economy falls, for example, paying benefits to the employees, tax schedules that allow taking less from workers and consumers when their wages and incomes fall and receiving more when wages and salaries increase. Fiscal and monetary policies that are adapted by policymakers to deal with inflation and unemployment are also evidence in most market economies (Tanzi, 2011). Provision of quasi and public goods Provision of quasi-public and public goods is another role that the government plays in the market economy. The government fills in the vacuum where the markets do not provide the correct and needed amounts of certain goods and services. Example of public goods that a market fails to provide includes defense, police protection, judicial system and security. Quasi-public goods include health services and education. These are the goods that the market fails to provide enough of. Essentially, the government should assist in provision of the latter and provide the former goods. It also extends its effects on controlling the external costs in the economy. The external costs may increase the cost of goods and services. Basically the government should correct any overconsumption and overproduction of services and goods that may lead to external costs. Creating competition Maintaining competition in the market economy is another role that the governments need to maintain. Competition is an efficient and optimal tool in market mechanism that will positively encourage the resource suppliers and producers to respond to consumer sovereignty and price signals. Therefore, the government should aim at eliminating non-competitive and monopoly power. Anti-monopoly rules and laws are well designed to promote competition and regulate business behavior. Conclusion Creation of a truly free market is not possible in the world of business. This has clearly been demonstration by the above involvement of the government in the market economy. The government has been actively been involved in creation of competitive and great environment leading to it being a major player in the market economy. The demand and supply is related to the government legal structures on economy, redistribution of income, competition, external costs, provision of public goods and social welfare (Lane & Ersson, 2002). References Dixon, T. & O’Mahony J. (2010). The Market Economy: 2010 Edition: Year 11 Preliminary Economics. Sydney: Pearson Education Australia Lane, J. & Ersson, S. (2002). Government and the economy; a global perspective. New York: Continuum International Publishing Group. Stonecash, R., Gans, J & King, S. (2011). Principles of economics. London: CengageBrian Tanzi, V. (2011). Government versus markets: The changing economic role of the State. Cambridge: Cambridge University Press. Read More