Free Market System and Government Intervention
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In a free market system, resources that are scarce are allocated through what is termed as price mechanism. Equilibrium prices can be determined by the supply decisions of businesses, the preferences, and also spending decisions of consumers. The free market system is still a powerful way of determining the way resources can be allocated among ends that compete amongst themselves. Those in favor of an entirely free market economy argue that any government intervention should be the lowest. On the other hand, socialist economists argue for state ownership or control and intervention of the free market.
In my view, government intervention can come in when there is a market failure, which refers to situations in which the conditions for attaining solutions that are market-efficient fail to exist. The situation comes about when there is an insufficient production or the use of various goods and services by the market. Market failures are usually associated with public goods, externalities or non-competitive markets. More often than not, a market failure is usually used as a justification for various forms of government intervention in a market. While interventions such as taxes, bail outs, regulations, and subsidies may be good, they may also lead to an inappropriate allocation of resources. Market failure could come about when the signaling and incentive function associated with the price mechanism does not operate optimally, which then leads to a loss of economic or social welfare. Incentives that producers and consumers have can be altered by government intervention in any market.
Any government could choose to intervene in the price mechanism on the basis of aiming to change resource allocation, as well as achieving what they would think as improvement in the social welfare and economy at large. Most governments usually intervene in the economy so as to influence the way scarce resources are allocated among competing users. In summary, the main reasons for any government intervention could be to improve the performance of the economy, correct market failure, and attain an equitable distribution of income or wealth.
There are numerous ways that a government can introduce policy intervention. As an example, the parliament could pass a number of laws that ban smoking in the work places or public arenas. Notably, the laws governing competition policy usually act against forms of anti-competitive behaviors that could be displayed by firms within the markets. On the other hand, employment laws could be introduced to legally protect workers by instituting maximum working hours or minimum wage in the market. The economy usually operates with a certain amount of intervention or regulation. Price controls can be placed by government on sectors such as rail transport, gas, electricity, and telecommunications. However, critics of government intervention in a free market economy claim it brings about an unnecessary burden of doing business (Mrinal, 1990). They also claim that it damages the competitive aspect of businesses.
However, government intervention could be used to create fresh competition into a market system. This could be done by doing away with the current monopolization of a service provider. An introduction of fiscal policy could be used to alter the pattern of demand within a given economy and the level of demand for various products. Any government could offer financial assistance for various business investments to conduct research or development. These could include tax credit or corporation tax, which can promote extra employment and new capital investment as well. Governments may also issue subsidies to consumers that would end up lowering the price of different merit goods. They are aimed at boosting consumption or output of products with positive measures put in place. Imposing of indirect taxes is for raising the prices of de-merits goods or products that have negative externalities meant to increase the cost of consumption. This will go a long way into reducing consumer demand towards a level that is socially optimal. Any undertaking by the government to change taxation or welfare payments is aimed at influencing the overall distribution of wealth or income for that matter.
There are also other interventions by the government that could be aimed at closing the information gap. Notably, market failure is due to consumers lacking information touching on the costs and benefits of the products that are in the market. Government intervention can be aimed at improving information that is available so that producers and consumers value the correct cost or benefit of any good or service in a market. Such information come in various ways, for example, compulsory labeling on the packages of goods such as cigarettes as health warnings aimed at reducing smoking, information on nutrition so as to deal with risks of obesity or other related conditions, anti speeding advertisement aimed at reducing road carnage, and also information on the dangers of addiction. They are all aimed at changing the perceived costs and benefits of consumption for the consumer. As a matter of fact, they may not affect the market prices in a direct manner, but, they may influence demand and then the output and consumption as well. It is important to note that advertisements are increasingly becoming hard-hitting and can have a tremendous effect on the consumers.
Notably, the effects of these government interventions are never neutral in any way. There will be losers and winners if the government intervenes. For examples, different taxes will have different effects on different consumers. While a free market is the only way to go, government intervention cannot be a bad idea. However, the general assumption is that the least governing policy creates more wealth. It is important to take note of essential services that cannot be given by the market without government support. These services may be financially viable or their charges may be too high for others to bear. Government intervention could take other forms such as the physical and financial infrastructure that are essential for the economic wellbeing. Government intervention can also be in housing, education or taking care of those who are unable due to environmental cases such as drought (McKinney, 2003).
While there may be two sides of the coin, it is important that those in the government weigh the advantages and disadvantages of any intervention or leaving things the way they are. However, there may be less time for the community to wait upon such debates. An economy like that of the United States’ is a free market economy run by supply and demand, but with some government regulation. While the debate rages on whether government intervention is necessary, those opposing the intervention argue that free markets will end up making businesses to protect consumers eventually, create affordable prices for each, and also give out superior products or services. They also argue that the government will be a burden that would increase the cost of doing business. On the other hand, those in favor for such regulations claim that various corporations do not look out for the public’s interest, hence the necessity for such interventions.
Any government’s intervention is meant to achieve equity and social efficiency (Mrinal, 1990). Social efficiency is where the marginal benefits to a society are equal to the marginal cost of consumption or production. Notably, externalities will make the market end up in a level of production or consumption that is above the level that can be termed as socially efficient. Government intervention is also needed in cases where public goods are underprovided by the market. Moreover, while government intervention can be quick to solve social problems, markets usually respond sluggishly to existing changes in demand and supply. This sluggishness may end up causing a permanent state of disequilibrium and instability. Free markets may be characterized by an inadequate provision for such entities as dependants or inadequate output of various merit goods.
Introduction of subsides or taxes by various governments are aimed at correcting forms of market distortions (Mrinal, 1990). As mentioned earlier, externalities can be checked by implementing tax rates that are equal to the size of external cost, and also giving rates of subsidy that is equal to the marginal external benefits. Furthermore, these taxes and subsidies can be used to change monopoly price, profit and output as well. Subsidies go a long way into persuading a monopolist to increase his output to a level that is competitive. Taxes and subsidies are also advantageous in that, they internalize externalities as they provide incentives that reduce external costs. The government can come up with laws that would regulate various activities that bring about external costs, regulate oligopolies and monopolies or provide consumer protection.
In conclusion, while a free market economy can be a good thing, government intervention can also come in handy to help its citizens. However, there are excellent examples of successful free market economies such as Hong Kong, which is totally free from government intervention. Those opposing any government intervention argue that free markets will eventually force businesses to protect consumers, create affordable prices for each, and also give out superior products or services. They also argue that the government will be a burden that would increase the cost of doing business. On the other hand, those in favor for such regulations claim that various corporations do not look out for the public’s interest, hence the necessity for such interventions.
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