The paper 'The Role of Government in a Market Economy' is a perfect example of a macro and microeconomics case study. It is necessary that before explaining the role of government in a market economy to define what is meant by a market economy. A market economy is defined as the economy in which decisions in regard to investment. Here, the prices of services and goods are determined in a free price system. It is quite evident that that market economies can widely range from a free market and laissez-faire variants to various interventionist and regulated markets variants.
Across the globe, most existing market economies include a certain degree of state-directed or economic planning activity thus categorized as mixed economies. With regard to the various roles of the government within a market economy, there are five key functions the government performs (Case, 2004). Case (2004) maintains that the government is entitled to provide the market economy with a well defined legal structure. This is considered as the most important function a government needs to undertake as without it a country's economy will automatically collapse.
Here, the government is required to ensure that proper property rights are implemented. Case (2004) suggests that it is also important that the government provide enforcement contracts and impose penalties for businesses or organizations that are engaged in unethical and illegal play. In order for the government to perform this function efficiently, it is important for it to furnish the economy with legislation, regulations, and rules. In addition, it is important that the government ensure that companies deliver quality products through defining ownership rights as well as enforcing contracts (Case, 2004). The second function of a government is to maintain competition within a market economy (White, 1999).
Evidently, since competition is the efficient and optimal market mechanism that largely encourages producers as well as resources suppliers to respond to customer independence and price signal, the government is required to fight non-competitive behavior and monopoly power. Here, the government has the mandate to create anti-monopoly laws that are largely designed to promote positive competition as well as regulate business behavior. It is also the government's role to redistribute income. Here, the government in given market economies should inevitably engage in programs that assure income redistribution through establishing the explicit intention of making tax policies fairer to all its citizens.
Further, it should engage in limiting the concentration of resources while at the same time maintains a wider diffusion of economic power among different households. White (1999) suggest that other means that the government is involved in redistributing income is establishing price support programs such as low-interest loan to the student as well as farm subsidy to farmers based on their family income.
Social security, welfare, and Medicare programs are other examples of government programs that largely support the elderly, sick, and poor. According to Giddy and Stockinger (2002), the government is expected to promote growth and stability across the country's market economy. It is the duty of the government to guide the overall market economic activity through maintaining steady growth, price stability as well as creating a high level of employment. Here, through adjusting its fiscal policy and spending, the government can be able to speed up its market economy rate were in the process of stabilizing on level of prices and creates employments (Giddy and Stockinger, 2002).
Fiscal policies are used to employ government spending as well as tax programs so as to stimulate a national economy especially during low inflation and high level of unemployment whereas monetary policies are used by the government to change a national supply of money as well as credit availability. In addition, the government can use monetary policy where it regulates the nation's money through interest rates, money supply, and various reserve requirements. Both monetary and fiscal policies ensure that the government is able to provide economic conditions in which the market economy of private enterprises can function effectively.
Further, these policies assist the government stabilize a nation's legal tender eliminating the need for inefficient and burdensome trading systems.
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