Government’s Role in a Market EconomyIntroductionTheoretically, the government’s role in a market economy is limited to restoring and promoting conditions, which are necessary for the working of a free market, and producing and/or distribution of goods that the players in the free market cannot produce or distribute. Specifically, it is argued that in ideal market conditions, the society would only care about efficiency, therefore restricting government’s role in the economic sphere to a bare minimum. Considering that the markets are anything but ideal, governments usually intervene in market economies; specifically, it becomes the governments’ duty to define private property rights, and also ensure that they are implemented; to regulate business; provide certain public goods; levy taxes; and redistribute income (Baumol and Blinder, 2011).
In other words, governments assume a managerial role if only to correct market failures such as externalities and monopolies among others; and business cycles such as recessions or economic booms. Governments’ roles in a market economy are also necessitated by the fact that although the society cares about efficiency, it also cares about other issues such as economic fairness, and the merits/demerits of goods.
Government’s role in the marketIn a market economy, the government takes up the role of allocation, whereby, it corrects market failures, and also considers the merit and demerit of goods sold in the market. Additionally, the government assumes the role of redistribution whereby, it comes up with a fair tax structure that considers the income levels of different groups of people with a view to enhance economic fairness. Additionally, the government has a responsibility of redistributing market resources either in monetary form or in-kind.
Finally, the government has a stabilisation role, whereby it engages the economy either through fiscal or monetary policies. Allocation roleThrough allocation, the government in a market economy corrects market failure by addressing market externalities, monopolies, public goods, and the merit/demerit goods. ExternalitiesExternalities are the costs or benefits that an economic decision maker does not account for (Tanzi, 1997). Since they are not considered in the decision-making process, the externalities cause divergence between the supply and the marginal cost of production (MSC) in a market, or demand and the marginal cost of consumption (MSB) in a market (Tanzi, 1997).
In theory, maximum efficiency in a market economy is attained when MSC and MSB are equal. By intervening, the government addresses the externalities, hence correcting the resulting market failure. Provision of public goodsThe government has a role to provide its citizenry with some public goods such as national defence, and national leadership among others (Arnold, 2010). No consumer in a given country is excluded from consuming the public good. Additionally, the government does not incur additional costs by providing the national goods to, say, new born children.
Based on that, economists argue that the efficient price of the public goods is zero. Notably, government funds public goods from the general budget, which is a product of the taxes that people pay. Even though high income earners pay more taxes than their low-income earning counterparts, the provision of public goods is uniform across the income groups. For example, both high-income earners and low-income earners are under the same national defence irrespective of their contributions to the tax kitty.