Should Governments Intervene in the Economy - Literature review Example

SHOULD GOVERNMENTS INTERVENE IN THE ECONOMY? Introduction With continuous technological advancements, competition andglobalization, economies have become complex and challenging. These elements have propelled people and organizations to specialize in various activities that have led to increased interactions among them. Bigger markets and deeper divisions of labor brought by globalization have become challenging for individuals to address thereby calling the need for government intervention. According to Lash and Batavia (2008), government intervention involves interference by the government on various actions and decisions taken by individuals, groups and institutions in relation to social political and economic matters. They further state that governments can intervene through laws and regulations that control certain activities or prices as well as through fiscal policies such as taxes. Another way that governments can intervene is through providing goods and services that are limited in the economy. Such provision ensures that there is no shortage in the economy that is essential in maintenance of equity (Lash & Batavia 2008). However, there still exists arguments whether the governments should intervene or not and if they do, to what extent. This paper argues that there is greater need for the government to intervene in the economy. It however proposes that marginal intervention other than full intervention is necessary to ensure that there is stability in the economy. Governments should not intervene at all time, they should give organizations leeway to structure themselves in the market and only intervene when deemed necessary. Intervention should also be done with the aim of creating efficiency and improvements in the economy. The benefits of government intervention discussed in the paper include greater equality in distribution of resources, reduction in unemployment, overcoming prolonged recessions among others. Why governments should intervene in the economy Equity in distribution of resources One of the reasons why the government should intervene is to ensure that there is equality in the distribution of resources. In a free market economy, high levels of inequality have been observed where a lot of resources are accessible to the rich with minimal resources being accessible by the poor. Kelly and Dollery (2009) support this assertion by stating that another characteristic of free market economies is that they have many monopolies of power. Who would like to work hard and be marginalized just because they do not have power? I believe none. To promote fairness and equality, this paper makes a strong case that governments should interfere in the functioning of the economy. Equality should be promoted in terms of outcomes, needs and preferences and even the protection of future generations. With their authorities, government can prevent rise of monopolies and poor wages through rules and regulations. Through such regulations, it will also promote equality of income and even competition. Competition itself in the long run further enhances equality because each firm will strive to be better and will offer better deals in the effort to attract prospective employees, customers and even investors. Another way in which the government can promote equality is through redistribution of income (Greater London Authrority 2006). A good way of achieving this is through taxation where the rich people are taxed more compared to the poor. The revenue from the rich can then be used to offer services and facilities to the marginalized areas and groups in the society. Canavari (2009) argues that governments should come in when there is social inequality such as discrimination. Addressing such social vices is vital in promoting peace that leads to a productive economy. Solving prolonged recessions Another reason why governments should marginally intervene is that they have the capacity to raise economies when faced with prolonged periods of recession. An economic recession is a period characterized by low private sector spending that leads to slow economic growth (Lash & Batavia 2008). It is worth noting that economic growth is vital both to individuals, organizations and the government because it offers required income and resources for the running of the economy. When there is reduced spending, governments can intervene by borrowing money from the private sector that they can use to exploit resources to improve the economy. In a situation where there is collapse in the money supply, government intervention is important because it plays a great and major role in printing money. Therefore, the government can come in and print money so as to increase money supply in the economy. Through adoption of policies, Spitzer (2011) suggests that governments have the power to maintain employment thereby protecting individual incomes. Such a responsibility cannot be managed by individuals or firms therefore, showing that governments play an important role. When there is economic boom, government intervention is necessary in reducing high credit that can put an economy into debts. Intervention ensures that economies function smoothly, without lack or inflation therefore, promoting stability. Solving market failure This paper proposes that government intervention is necessary in dealing with the problem of market failure and other negative externalities. Market failure in any economy is an indication that consumer tastes and preferences are not met and that there are minimal profits and revenues for development (Canavari 2009). Market failures also indicate that resources are not utilized properly and to their full capacity. It is through government intervention that public goods and services such as roads and security can be offered because private firms cannot offer the services since they do not get profits out of them. Government intervention is necessary in provision of these goods which cannot be provided in a free market economy. In preventing market failure, government intervention is critical because it promotes social welfare. Spitzer (2011) points that governments have the power to minimize negative outcomes such as pollution in order to promote welfare. Governments can achieve this through subsidizing and encouraging safe forms of production and highly taxing those that are not environmental friendly. It is through governments intervention that access to services such as education can be provided that will be a social benefit. Having an educated and informed economy is important in preventing market failure because it enhances creativity, innovation and problem solving. Economic efficiency calls for governments to intervene when prices are set high above the market standards. Governments have the power to regulate and lower prices, promote competition that will lead to market efficiency. Through tax relief and subsidies, the government can be able to alter demand in the market which will in turn affect pricing. Closure of information gap Closure of the information gap is yet another reason why governments should intervene in the economy. The theory of efficient markets states that availability and accessibility to information is important in the proper functioning of any market. The Greater London Authority (2006) highlights that many consumers lack knowledge on products especially in relation to their use, pricing and quality. It argues that deceptions are evident through advertisements that give false information on products, their costs and benefits. According to Spitzer (2011), efficiency in a market is created when all agents in a market have perfect information of what they are selling or buying. Though several markets function well without perfect information, Spitzer suggests that some goods require full information because they are either complex to use or have small probabilities. Government intervention is essential to close the gap and ensure that the parties have the required to make informed choices. It can be achieved through legislation and formation of bodies that will check of the validity of information. For example, it is through government intervention that companies put labels on products such as cigarettes. Government intervention also plays a major role in screening of advertisements and programs. Through campaigns, warnings and programs, the public gets informed on the dangers and benefits of certain products or actions. In essence, government intervention influences consumer choices, affects demand and leads to an informed and healthy society. It ensures that information is complete, easy to understand and accessible thereby leading to rational choices from the consumers. Curb imperfect competition Finally, as much as competition is necessary and healthy to any economy, other type of competition can be destructive. Yes, governments should intervene in order to prevent the occurrence of cut-throat and imperfect competitions. Kelly and Dollery (2009) describe cut-throat competitions as those forms of business practices that are anti-competitive in that they set prices that are not able to cover production costs with a certain period of time. In support of this Lash and Batavia (2008) also state that free markets also experience situations where organizations set very low prices so as to prevent entry of new competitors. They also add that such acts lead to price wars that lower the economy in the long run because minimal profits come out of such wars. In relations to prices, governments should also intervene when a market is faced with instability in supply prices. For example, if there is traffic congestion in a certain city, government intervention through setting prices that are equal to marginal costs is necessary to correct and smooth the prices. Some other prices are set by organizations to prevent new entrants into a market. Such prevention slows innovation yet another reason for governments to intervene. Government intervention ensures that there is healthy competition and that firms offer products and services that suit the consumer needs. When economies face major problems such as natural disasters, government intervention becomes paramount in taking steps and coming up with plans that will help economies to return to their normal state. Conclusion In conclusion, some form of government intervention and regulation is important for a health economy. It ensures that there is effective competition and products are up to the standards of consumer needs. However, governments should intervene when economies face a problem that needs to be addressed or when the intervention will lead to improvement in the economy. The paper has discussed interventions when there are incomplete or inefficient markets. Markets may not work properly due to information problems, inequalities and externalities that call for the need for correction. Interventions such as control of prices, provision of public goods, information and prevention of externalities have been discussed in detail to show the need for governments to intervene in economies. Furthermore, intervention on some issues is critical because it keeps markets on check and ensures that there is stability and smooth functionality of activities. However, in intervening care should be taken on how the intervention process is carried out. It should not be great that will cause rigidity and affect proper functioning of the market. Before intervention procedures, attention should be paid to how individuals and firms will be affected and therefore, suit the process to the majority. In solving a problem, interventions should be carried out in a way that minimizes dependency on the government. Government interventions, when efficiently carried out, stimulate business activities, stabilizes markets and the financial sector which in turn promote economic growth. References Canavari, M., 2009. International marketing and trade of quality food products, Wagenigen Academic Publishers, Wagenigen. Greater London Authority, 2006. The rationale for public sector intervention in the economy, Greater London Authority, London. Kelly, A., & Dollery B., 2009. ‘Regional development and local government: three generations of federal intervention.’ Australasian Journal of Regional Studies. Vol. 15. no. 2, pp 171-193. Lash N, & Batavia, B., 2008. ‘Government economic intervention and corruption.’ Journal of Development Areas, Vol. 47, no. 2, pp 1-15 Spitzer, E., 2011. Government’s place in the market. Massachusetts Institute of technology, Boston. Read More