role of government in market economies

8/10/2019 Role of Government in Market Economies

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Role of Governmentin a Market Economy

M Manjunath Shettigar, MA, PhDProfessor of Economics,Department of Professional Studies,Christ University,Bangalore - 560029


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GDP Figures for Select Countries from 1500 to 2003(in million 1990 International Dollars)Source: Angus Maddison- Contours of World Economy 12030 AD, OxfordUniversity Press Inc, New York, 2007, pp 117

1500 1700 1820 1950 2003

India 60,500 90,750 111,417 222,222 2,267,136

China 61,800 82,800 228,600 244,985 6,187,984

USA 800 527 12,548 1,455,916 8,430,762

WesternEurope

44,183 81,213 159,851 1,396,078 7,857,394

Japan 7,700 15,390 20,739 160,966 2,699,261


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Global ranking by 2050


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All institutions are the result ofevolution

Family, religion, educationalinstitutions, government, economicsystem, etc.


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As all of you may know humansocieties are the result of evolution

Govt too emerged like that only

Political systems too developed likethat

People develop institutions that servesome purpose/that are required/ thatare rational


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1

A2

3 54

B


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Donkeys curve

1

A2

3 54

B


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Systems developed by us if found tobe defective/dysfunctional,

It will be reformed or replaced

e.g.

Caste system in India

Family system


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What is aMarket Economy?

An economic system that

answers the What, How, andFor Whom questions usingprices determined by the

interaction of the forces ofsupply and demand


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What is Capitalism?

An economic system characterized

by private ownership of resources

and markets, and where people

enjoy freedom to engage in the

economic activity of their choice

as entrepreneurs and employees.


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What is theInvisible Hand?

A phrase that expresses the

belief that the best interests ofa society are served whenindividual consumers and

producers compete to achievetheir own private interests


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Markets exist because none of usproduces

all the goods and services we require tosatisfy our needs and wants.

A market is an arrangementthat allows buyers and sellers

to exchange goods andservices.

Specializationis theconcentration of the productive

efforts of individuals and firmson a limited number ofactivities.

Why Do Markets Exist?


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The Free Market Economy

In a free marketeconomy, householdsand business firms use

markets to exchangemoney and products.Households own thefactors of production andconsume goods andservices.


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The Markets Self-RegulatingNature

In every transaction, the buyer and seller consider onlytheir self-interest, or their own personal gain. Self-interest is the motivating force in the free market.

Producers in a free market struggle for the money of

consumers. This is known as competition, and is theregulating force of the free market.

The interaction of buyers and sellers, motivated by self-interest and regulated by competition, all happenswithout a central plan. This phenomenon is called the

invisible handof the marketplace.


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Advantages of the Free Market

Economic Efficiency

As a self-regulatingsystem, a free marketeconomy is efficient.

Economic Growth

Because competitionencourages innovation,free markets encouragedevelopment of

technology, whichcontributes to fastergrowth.

Economic Freedom

Free market economies havethe highest degree ofeconomic freedom of any

economic system.Additional Goals

Free markets offer a widervariety of goods and servicesthan any other economic

system. Equality

Encouragement of hard work,merit & risk taking


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What isConsumer Sovereignty?

The freedom of consumers

to cast their Rupee votesto buy, or not to buy, atprices determined in

competitive markets


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What are Criticisms of aMarket Economy?

Inadequate competition Inequality of income and wealth Less/no production of certain goods

public/ merit/ essential goods Externalities Unethical practices

Uncontrolledgreed/selfishness/materialism Economic instability


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Options for governmentintervention in markets

Government Legislation andRegulation

Competition policy State Provision of Public/Merit

Goods

Taxes & subsidies

Macroeconomic PolicyIntervention

Social security/safety


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The effects of governmentintervention

One important point to bear in mind isthat the effects of different forms ofgovernment intervention in markets are

never neutral financial support givenby the government to one set ofproducers rather than another willalways create winners and losers.Taxing one product more than anotherwill similarly have different effects ondifferent groups of consumers.


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The law of unintendedconsequences

Government intervention does not always workin the way in which it was intended or the wayin which economic theory predicts it should.

Part of the fascination of studying Economics isthat the law of unintended consequencesoften comes into play events can affect aparticular policy, and consumers andbusinesses rarely behave precisely in the wayin which the government might want!

We will consider this in more detail when weconsider government failure.


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Possible Causes ofGovernment Failure

(a) Political self-interest

(b) Policy myopia

(c) Regulatory capture.

(d) Government intervention anddisincentive effects

(e)Government intervention and evasion

(f) Policy decisions based on imperfectinformation

(g) The Law of Unintended Consequences

(h) Costs of administration and enforcement


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What are the main reasons forgovernment intervention?

The main reasons for policy interventionare:

To correct for market failure To achieve a more equitable

distribution of income and wealth

To improve the performance of theeconomy


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Thank You

M Manjunath

Shettigar

role of government in market economies

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