What Is the Proper Role of Government in a Market Economy?

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What Is the Proper Role of Government in a Market Economy?

By | Jan. 2011
Page 1 of 3
What is the proper role of government in a market economy?

All people around the world make a question: How much should the government influence the economy of a country? And there are many answers. Regulating the public goods in a manner where the negative externalities would be minimized, government’s role is to uphold freedom of the market with government providing safety and stability only for essentials. If there are too many regulations by the government, it will slow down and stop jobs, prices will go up and the economy will slow down. If there is no government at all everyone will act in their own interest and there will be too many negative externalities and the market will become crazy. Still, if the market has more space from the government, it will work better.

Dealing with externalities is one of the government’s challenging jobs. The government has the right to ban the behavior with laws. For example, in page 48 Wheelan tells for a neighborhood in California. In order to look beautiful and safe, there is a law which bans the color of painting buildings. In this case people will act in their own interest by saving the public good. The city will look prettier. Another way of regulating externalities is to tax the offending behavior. For example, any family can choose the size of its own vehicle. There was a plan to produce the Unimog (large cars), a six tons heavier car than SUV (small cars). Still the SUV is not banned. Driving this car would be less polluted to the environment so the government provides lower taxes. However, sometimes taxes bring more problems.

If there are too many regulation from the government, then the government will ban Unimog cars in order to avoid the environmental pollution. In this case, it will be impossible for creative destruction to happen because people will be afraid to compete. Too much regulation can raise the cost of goods, stifle innovation, shackle the economy. People will avoid laws and there will be...