IntroductionThe question many of the investors could be asking themselves, is if the market economy is free without any form of influence? While in the market economy, the supply and demand for goods and services is expected to operate and determine its price, in many occasions this may not be the case. This is because it emerges that some of the products and services are very critical and cannot purely be left in the hands of private persons to take charge. Take the example of the security, healthcare, education, external forces and even distribution of national resources (McMillan 2002).
These and many more factors tend to erode that confidence that people may be having about the existence of the market economy. In the world over, there is an element of confusion between capitalism and market economy. Capitalism is characterized by the ways in which strong economies tend to dominate over others and therefore taking due advantages in the market and therefore need not be confused with free market economy. Further, capitalism doesn't only take into account the economic process but political and social processes as well.
Because of the selfish interests that exist among the key economic players, it is therefore concluded that capitalism cannot be used to mean a free market economy (Watts 2012). It is in this regard that this essay looking forward to explain the role of the government in a free market and at the same the reasons as to why free market can never be. Definition of key terms: Market economyMarket economy refers to an economy where major decisions on investment and production as well as distribution are determined by the supply and demand of goods and services and prices of goods and services are reached in a free price process.
In other words, in a free market economy, investment decisions and allocation of resource is purely a factor of the market (Jail 2010). Role of government economyFor substantial economic growth to take place according to Adam Smith, three important factors which include self interests and property rights as well as the division of labor have to be enjoined. While self interests are characterized by the need by the producers to avail their products and services in the market for exchange with buyers, the sellers’ interests are founded on the need to buy goods and services at more affordable prices (Easterly 2002).
In the case of property rights as ought to be in the free market economy, individuals are expected to have exclusive rights on certain properties in order to allow them to trade freely. On the other hand, the division of labor is expected to facilitate different economies of scale in order to maximize production. However, in a situation where the market does not function efficiently as ought to, it is assumed to have failed and so called market failure (McMillan 2002).
Such circumstance prompts the government to intervene and bring sanity and efficiency into the system by carrying out various functions as discussed below. Providing the legal structure of the economy: It is important to note that this is the primary role of the government in the market economy. It is the responsibility of the government to ensure the necessary measures are taken to prevent economic collapse and this highly depends on the enacted legislations (Easterly 2002).
Further, this role is also important in ensuring that individuals have exclusive property rights and that they transact freely, provide a legal framework to be followed when enforcing different contracts and finally to act as a referee of all the activities that take place at the market so as to impose of necessary penalties that could punish foul plays (Jail 2010). However, to perform this function, the government must be in a position to furnish different regulations as well as legislations and other means that could be used to ensure product quality and proper ownership rights as well as contract enforcement.
Examples of the legal systems that have been introduced to make necessary interventions in the market economy include FDA, The FED and SEC (Barrio 2002).