The paper "The Relationship Between Government Intervention in Economy" is an outstanding example of macro and microeconomics coursework. There has been a great debate between the economist and other scholars on whether the government can intervene in an economy fully or limits its intervention to only emerging industries. The free-market economist opposes the government intervention citing various reasons. These reasons include the risk of poor governance, effects on individual freedom to spend, and causing market inefficiency (Gruber, 2004). Contrary, other scholars support government involvement in an economy since it acts as a regulatory mechanism that corrects market inefficiencies, which does not correct itself.
The reasons cited by those for government intervention includes correcting market failure, a tool of macroeconomics, and tax function (Gruber, 2004). The essay discusses the need for and against government intervention in an economy. The conclusion elaborates if it is best for the government to intervene in an economy or allow market forces to regulate it. The free-market economist assumed that the economy has a self-regulatory mechanism that corrects its deviation from equilibrium. The free market was termed as laissez-fair which is a French term meaning leave it alone.
According to Arrighi (2007), Smith advocated for the free market but encouraged little government intervention concerning establishing fundamental laws and regulation that acts as a framework for businesses in an economy. The book further terms free-market economy as a market that builds faith in individual and distrust for governance body. Therefore, the lack of government intervention in an economy may lead to malpractices that are advantageous to one group and disadvantageous to the others. Smith considered little government intervention in an economy healthy since investors turned to it for guidance for example subsidies, formulation and enactment of trade policies, and provision of grants (Arrighi, 2007).
Therefore, the economy cannot act on its own without government intervention and its limitation to only emerging industries is not sufficient in developing a robust and efficient economy. According to Gruber (2004), government participation is categorised into two forms that are social and economic involvement. The two types of interventions affect the market directly and indirectly. The economic intervention entails those rules and regulations that affect price levels.
The government adopts economic participation with two motives; protecting the consumer from the price hike, and small enterprise in an economy dominated by a few large companies. The small companies are always disadvantaged since large corporations enjoy economies of scale resulting in a lower cost of production. The low cost of production enables them to sell its products at a lower price compared to infant companies which create a disparity in profit margins. These lead to the creation of monopoly effect which lowers consumer satisfaction since they lack a broad range of products to choose from when making consumption decision.
According to Fischer (1993), the government assumes that the market is not perfectly competitive. Thus its involvement tries to bring out a common ground for firms with different financial muscles to compete fairly. Therefore, economic interventions prevent unhealthy competition that discourages new entrance to the market and limiting consumer satisfaction. The unhealthy competition entails practices such as price wars and unethical advertising.