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?

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 many dead weight losses. The potential for black market will be high. So it is better that the government interfere less so that too much taxation and banning will not damage the market economy.

Reading in page 51, Wheelan tells that government makes a market economy possible. People may think that if the government would get out of the way, the markets will deliver prosperity. But, they are wrong. No government dashes capitalism against the rocks. Infrastructure is one of the examples. In Nigeria the government is not functioning and even though they have the largest reserves of oil and natural gas in the world, there is no infrastructure for them to start the business.

That the market economy can not proceed without government helping a little bit Karl Marx helped us understanding too, saying: “Modern market with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells.” If there no law, or tax, no public good, no regulation, no infrastructure than everyone would do whatever they want, there would be chaos or even violence, so that even the capitalists will not be able to control their own business.

Wheelan said: “When government controls some element of the economy, scare resources are allocated by autocrats or bureaucrats or politicians rather than by the market.” - page 67. An example of this is how the Soviet Union did not consider birth control to be an economic priority. So, they didn’t allow contraceptives to be used, leaving abortion as the only form of the family planning. In the years of communism, there were two abortions in every single live birth. Since the collapse of Soviet Union, the abortion rate has fallen by half, because contraceptives were available.

Both, Wheelan and Adam Smith show us how it is necessary just a little intervention...
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