What is a market economy and why is it essential that government play a role in such an economy?
Posted by admin in Finance Sunday, 14 August 2011 04:39 3 Comments
What is a market economy and why is it essential that government play a role in such an economy?
A “market economy” is an economy driven by the forces of supply and demand.
If people want more of an item or service (demand), then producers will manufacture more of them or more businesses will open up to provide the service (supply).
If people do not want an item or service, then producers will stop manufacturing it and businesses providing that service will close down.
It will depend on who you ask whether it is essential the government ought to play a role (whether essential or at all) in the supply and demand dynamic.
This is quite a hot issue since the new administration has decided to take a more active role in directing the economy than the previous administration.
In essence, people who advocate more government intervention in the nation’s economy are saying one of two things: 1) That the supply/demand dynamic is unsound, and can lead to massive boom and bust cycles or that 2) The supply/demand dynamic is fundamentally unfair.
Yes, a market economy is prone to boom and bust cycles (the tech boom in the 90′s, the housing bubble in the ’00s, etc). The goal of government intervention in such a case would be to limit the growth of booms and lessen the consequences of a bust. This may mean bail-outs, stimulus packages, and so on. Whether or not this is in the long run beneficial to the economy is up for debate.
When a government decides to subsidize a good (an electric car) or a service (health care), the actual cost of the good or service tends to go up.
If you ran a business, and your client had an almost unlimited chequebook (as governments seem to think they have), you might feel comfortable asking 2-3 times what you might ask your average client. The difference between what you would charge an average client and what you would charge a client that has infinite funds is called “subsidization.”
In the name of fairness, subsidization skirts around the issue of supply and demand by creating a superficially large demand for a good or service that would ordinarily not draw many customers.
Let’s say you couldn’t buy the new iphone because you could not afford it. Now let’s say that you had the opportunity to buy it for $4, with someone else paying the $200 extra you couldn’t afford. Might you purchase that iphone after all?
Subsidization has created an artificial market for a good that you could not ordinarily afford, and would not succeed in a market economy without government support.
In essence, government can regulate markets, subsidize goods and services they deem necessary and proper for the citizenry to have access to, and punish economic activity (offshore drilling) that they do not deem necessary and proper for society through taxation.
In a market economy everything is controlled by the market forces or the forces called demand and supply.The price of goods and services are determined by the level of demand and supply.The government needs to play a role in such an economy because the market economy can sometimes face problems of recession and depression and in such a situation the government must provide help for companies which are facing a problem.Besides the financial part governments are also concerned about the welfare of the people so they restrict the inflow of those goods which are harmful to people’s health like addictive drugs which the market isn’t concerned about.
A “market economy” is an economy driven by the forces of supply and demand.
If people want more of an item or service (demand), then producers will manufacture more of them or more businesses will open up to provide the service (supply).
If people do not want an item or service, then producers will stop manufacturing it and businesses providing that service will close down.
Many economists believe that the role of government intervention improves the scenario of the market system. The government can easily enforce the rules that can help in smooth functioning of the market system.